German Notes Gain as Banks Pay Back Fewer ECB Loans

German notes rose, pushing two-year yields to a five-week low, as the European Central Bank said financial institutions will repay less emergency loans than forecast, suggesting they remain wary of lending to each other.

Austrian and Dutch two-year securities also gained after the ECB announced 356 banks will hand back 61.1 billion euros ($80.4 billion) next week. The median forecast of economists in a Bloomberg News survey was for 122.5 billion euros. Italian and Spanish bonds advanced after an Ifo institute report showed business confidence in Germany, Europe’s largest economy, jumped to a 10-month high in February. Italy’s two-year notes rose for the first time in six days.

“The number was lower than the market was expecting and that’s that making German notes rally,” said Mohit Kumar, head of Europe and U.K. rates strategy at Deutsche Bank AG in London. “It shows there is more excess liquidity in the system and that means monetary policy is accommodative and core rates will stay low.”

Germany’s two-year yield fell five basis points, or 0.05 percentage point, to 0.12 percent at 4:33 p.m. London time, the lowest level since Jan. 17. The price of the 0.25 percent security due March 2015 rose 0.095, or 95 euro cents per 1,000-euro face amount, to 100.26.

The 10-year bund yield was little changed at 1.57 percent after climbing three basis points to 1.60 percent.

Core Rates

Volatility on Dutch bonds was the highest in euro-area markets, followed by those of Belgium and Germany, according to measures of 10-year debt, the spread between two-year and 10-year securities and credit-default swaps.

Austria’s two-year yield declined four basis points to 0.15 percent and the rate on similar-maturity Dutch notes slipped six basis points to 0.21 percent.

Futures traders decreased bets that interbank borrowing costs will rise after the ECB’s announcement.

The implied yield on the three-month Euribor futures contract expiring in December dropped as much as eight basis points to 0.31 percent, according to data compiled by Bloomberg. That’s the lowest rate since Jan. 11.

Three-month Euribor, the rate at which European banks say they see each other lending in euros, was at 0.218 percent today, according to data from the European Banking Federation. That’s the least since Jan. 25.

Business Sentiment

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, climbed to 107.4. That’s the fourth straight gain and the highest since April, fueling speculation that the euro-region crisis is easing.

Italy’s 10-year yield fell five basis points to 4.45 percent. The rate on similar-maturity Spanish bonds also dropped five basis points, to 5.15 percent.

“The Ifo is good news,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “The focus is also on the Italian elections. There’s a bit of a rally in Italian and Spanish bonds, which to me signals investors have positioned themselves for the different scenarios and are waiting to see what the outcome is.”

Italian two-year notes snapped their longest losing streak since October as election candidates prepared to hold separate press conferences tonight in a bid to win over voters before the Feb. 24-25 elections.

The two-year yield fell four basis points to 1.68 percent, still heading for a 10-basis point weekly increase.

German bunds handed investors a loss of 1.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds returned 0.6 percent and Spanish debt 2.2 percent.

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