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Former-ECB Economist Stark Says Euro Area Needs to Shrink

German bunds rose, with two- and five-year yields dropping to records, after an auction of securities due in 2014 drew a negative yield for the first time as investors sought a haven from the region’s financial turmoil.

Two-year notes advanced for the fifth time in six days after Germany allotted 4.17 billion euros ($5.1 billion) of the debt at an average rate of minus 0.06 percent at today’s sale. Finland’s two-year yields fell below zero for the first time, while rates on 10-year French and Austrian securities also tumbled to records. Spanish bonds dropped after a report showed bad loans at the country’s banks jumped to an 18-year-high.

“Everybody’s still looking for a safe haven and Germany is under the spotlight,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “We’ve also seen increasing demand in other core European countries as well. There’s no good news regarding the debt crisis.”

The German two-year yield dropped one basis point, or 0.01 percentage point, to minus 0.061 percent at 4:46 p.m. London time after reaching minus 0.074 percent, the lowest since Bloomberg began tracking the securities in 1990. The zero percent note due in June 2014 gained 0.025, or 25 euro cents per 1,000-euro face amount, to 100.115.

A negative yield means investors who hold the existing notes to maturity will receive less than they paid to buy them. They would lose about 1,150 euros per 1 million-euro face-value if they hold the existing securities until they mature.

The five-year rate dropped as much as four basis points to an all-time low of 0.254 percent, and the 10-year yield declined three basis points to 1.2 percent.

Work Harder

German debt returned 12 percent over the past year through yesterday as the region’s debt crisis worsened, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French and Finnish securities both gained 11 percent.

German Chancellor Angela Merkel said the “European project” may be in jeopardy unless policy makers work harder.

“We haven’t yet shaped the European project in a way that we can be sure that everything will work, will turn out well,” Merkel said in an interview with her Christian Democratic Union party’s website posted today.

Europe’s leaders need to move toward a more complete monetary union if “substantial” spillover effects for the global economy are to be avoided, the International Monetary Fund said in a staff report issued today.

Finland’s two-year yield fell as much as three basis points to minus 0.008 percent. Austria’s two-year yield slipped below zero for the first time yesterday, before climbing one basis point today to 0.06 percent.

Deposit Rate

Investors have sought returns in some of Europe’s stronger economies since the European Central Bank cut its deposit rate to zero this month in an attempt to stimulate credit supply and lending by discouraging banks from parking cash. The ECB lowered its main refinancing rate to a record 0.75 percent on July 5, and President Mario Draghi signaled on July 9 that policy makers may be open to another interest-rate cut.

“It’s just doom and gloom,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The ECB’s zero deposit rate is forcing people up the curve into paper assets, and that’s feeding through everywhere at the moment.” A yield curve is a graph that charts the rates of bonds of a similar type with different maturities.

French Notes

French two-year notes dropped for a second day before the government sells securities due in 2015 and 2016 tomorrow. The nation is also due to auction five-year notes and inflation-linked bonds due between 2019 and 2040.

The two-year yield rose two basis points to 0.12 percent. Ten-year yields climbed one basis point to 2.1 percent.

Bank of New York Mellon Corp., the world’s largest custody bank, is considering imposing a charge for money left by clients in Europe after the ECB’s deposit rate cut, Todd Gibbons, the bank’s chief financial officer, said in a telephone interview.

Spanish two-year notes fell for a third day as central bank data showed bad debts as a percentage of total lending climbed to 8.95 percent in May from 8.72 percent the previous month.

Lending and deposits in the banking system both declined, the regulator said.

The Spanish two-year yield jumped 29 basis points to 5.01 percent, and 10-year rates rose 13 basis points to 6.96 percent.

Volatility in Spanish government debt was the highest in the euro area today, followed by Belgium and Ireland, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.

Spain is due to sell as much as 3 billion euros of debt due in two to seven years tomorrow.

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