Yields on Government Bonds Drop to Lows on De Guindos

German, U.S. and U.K. yields fell to all-time lows after Spanish Economy Minister Luis de Guindos said the future of the euro is at stake, driving demand for the safest government securities.

German two-year note yields fell below zero for the first time and 10-year yields on Austrian, Dutch, Finnish and French bonds dropped to records as data affirmed euro-region manufacturing shrank in May. Spain’s 10-year yield exceeded 6.5 percent for a fifth day after de Guindos said yesterday that we’re in a “very difficult situation.” The euro weakened to a 23-month low versus the dollar as euro-region unemployment rose to the most on record and before today’s U.S. payrolls report.

“There is a real sense of impending panic spreading now and that’s exacerbating all of these moves,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Safe havens are alive and well and risk aversion is likely to intensify as long as Europe’s problems remain unresolved.”

The German two-year yield slid to as low as minus 0.002 percent, the first time the rate on the securities has been negative, according to data compiled by Bloomberg, and was at 0.005 percent at 12:25 p.m. London time. The price of the zero percent note due in June 2014 was at 99.99.

A yield below zero means investors will receive less in repayments on the German securities when held through to maturity than the amount they paid to buy them.

Danish and Swiss two-year rates were also negative, according to data compiled by Bloomberg.

Negative Levels

“It was only a matter of time, given the stressed environment that we’re in in the euro area, that we saw a drop to slightly negative levels,” Norbert Aul, a fixed-income strategist at Royal Bank of Canada in London, said, referring to German two-year yields. “If the 10-year yield falls to as low as 1 percent, then everything out to three years has the potential to go negative.”

The 10-year bund rate dropped two basis points to 1.18 percent after reaching 1.148 percent, the lowest since Bloomberg began collecting the data in 1989. Its seven-week advance is the longest run since May 27 last year. Five-year yields reached an all-time low of 0.318 percent and 30-year bond yields touched 1.654 percent. Yields on U.K. gilts of all maturities dropped to less than 3 percent for the first time. The U.S. Treasury 10-year note rate declined to as low as 1.5223 percent.

Record Unemployment

“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” de Guindos said yesterday. Ireland will start counting votes today on a referendum on the European Union’s fiscal treaty.

The euro area is in real danger of disintegrating unless policy makers revamp the bloc’s fiscal ties, Economic and Monetary Commissioner Olli Rehn said.

“The way things are going and under the current structures, the euro area has a significant risk of breaking up,” Rehn said in a speech at a European Commission event in Helsinki. “We’re either headed for a deterioration of the euro area or a gradual strengthening of the European Union.”

Euro-area unemployment reached 11 percent in April and March, the highest rate on record, the European Union’s statistics office in Luxembourg said.

U.S. non-farm payrolls probably rose by 150,000 in May, after the smallest gain in six months in April, according to the median forecast of economists surveyed by Bloomberg News before the report today.

LCH Clearnet

Spain’s 10-year yield rose as much as seven basis points, or 0.07 percentage point, to 6.63 percent. The yield premium, or spread, over the Bloomberg Fair Value index of AAA rated European debt was 510 basis points at yesterday’s close. It’s been wider than 450 basis points every day this week. LCH Clearnet Ltd., Europe’s biggest clearing house, increased the cost of trading Irish and Portuguese debt by an extra 15 percent when yield spreads for those securities sustained an increase above that level.

Rachael Harper, a spokeswoman for LCH in London, declined to comment on Spanish bonds when reached by phone today. “The yield spread is one of many factors considered when determining whether to increase margin required for European government bonds,” she said in an e-mailed response to questions.

The cost of insuring against a default on Spanish government bonds climbed to a record 614, according to data compiled by Bloomberg. The euro fell as much as 0.4 percent to $1.2312, the least since July 1, 2010.

‘Bund Rally’

Yields on 10-year German bunds will probably decline to 1 percent, BNP Paribas SA fixed-income strategists including Matteo Regesta in London and Bulent Baygun in New York wrote yesterday in a note to clients.

“The bund rally is showing no signs of exhaustion,” the strategists wrote. “It is hard to envisage an effective backstop to the current crisis being implemented in the short term given the current disarray of policy makers in Europe.”

The rate on 10-year Italian bonds fell four basis points to 5.86 percent after rising to 5.96 percent. The two-year rate climbed as much as 16 basis points to 4.60 percent.

Thailand, which shares Italy and Spain’s BBB+ rating at Standard & Poor’s, has 10-year borrowing costs of 3.65 percent.

Volatility on French government bonds was the highest in developed markets today followed by Ireland, Sweden and Finland, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Manufacturing Shrinks

French 10-year yields dropped as much as 11 basis points to as low as 2.25 percent. The rate on similar-maturity Austrian debt fell to 2.025 percent, Dutch 10-year rates retreated to 1.486 percent, and Finnish yields declined to 1.41 percent, all the lowest on record.

A gauge of euro-area manufacturing decreased to 45.1 in May from 45.9 in April, London-based Markit Economics said today. The index for Spain fell to 42, from 43.5, Markit Economics said. A figure below 50 indicates a contraction.

German debt has returned 4.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have 5.2 percent, and Italian bonds rose 6.8 percent, the indexes show. Treasuries earned 2.2 percent, with gilts making 3.1 percent.