German Bonds Fall as Euribor Futures Drop on ECB Repayment BetsAnchalee Worrachate and David Goodman
German government bonds fell, with two-year yields rising to the highest since June, on speculation financial institutions will begin paying back loans from the European Central Bank, pushing up overnight borrowing rates.
Futures contracts on the three-month euro interbank offered rate, or Euribor, dropped and securities from Austria, France and the Netherlands also slid. French 10-year bond yields rose to the highest in more than two months as borrowing costs increased at an auction. Repayments of loans taken from the ECB’s Longer-Term Refinancing Operation will be possible from the end of this month.
“There is some selling pressure in the short-dated core notes and that’s driven primarily by speculation that banks will pay back LTRO and drive overnight rates higher,” said Soeren Moerch, the head of government-bond trading at Danske Bank A/S in Copenhagen. “The market is badly positioned for this and that caused a bit of a selloff.”
Germany’s two-year note yield rose seven basis points, or 0.07 percentage point, to 0.20 percent at 4:51 p.m. London time, the highest since April 5. The zero percent security maturing in December 2014 fell 0.135, or 1.35 euros per 1,000-euro ($1,336) face amount, to 99.63.
The nation’s 10-year bund yield gained four basis points to 1.61 percent, after rising to 1.63 percent, the highest level since Oct. 22.
The implied rate on Euribor futures contracts expiring in December 2013 rose 10 basis points to 0.455 percent after advancing by as much as 11 basis points, the biggest one-day increase since March 16.
Three-month Euribor rose to 0.204 percent today, according to data from the European Banking Federation. That’s up from a record low of 0.181 percent in December. It climbed to a record high of 5.393 percent in October 2008, data compiled by Bloomberg show.
The Frankfurt-based ECB lent financial institutions about 1 trillion euros for as much as three years via two LTROs in December 2011 and February last year.
The loans were intended to ease financial tensions in the market and to spur demand for higher-yielding assets such as Italian, Portugal and Spanish bonds as the debt crisis pushed borrowing costs in those countries to levels that threatened to shut them out of capital markets.
Banks in so-called core countries including Germany are likely to be the first to repay the ECB loans, according to Deutsche Bank AG.
They are likely to repay between 126 billion euros and 167 billion euros, assuming that “50 to 66 percent of the take-up of core banks is repaid,” Soniya Sadeesh, a strategist at the bank in London, wrote in an e-mailed note today. “This need not occur all on the first repayment date, and is more likely to be an ongoing process over the year.”
France sold 7.98 billion euros in debt with yields rising as receding concern that the euro will break up diminished demand for safe-haven securities.
The Paris-based treasury sold 4.045 billion euros of five-year debt at an average yield of 1.06 percent, compared with 1.01 percent for October 2018 securities on Dec. 6. It sold 2.35 billion euros of 2015 notes at an average yield of 0.24 percent and 1.585 billion euros of 2017 securities at 0.74 percent. It also sold 1.69 billion euros of inflation-protected securities.
France’s 10-year yield rose five basis points to 2.18 percent, after reaching 2.19 percent, the highest since Nov. 7.
Spanish securities dropped even after the nation matched its maximum target of 4.5 billion euros and borrowing costs fell at its second bond sale of the year.
Spain allotted notes maturing in October 2015 notes at an average yield of 2.713 percent, down from 3.358 percent at the previous sale on Dec. 13. It auctioned securities due in January 2018 at 3.77 percent, versus 3.988 percent on Jan. 10, and bonds maturing in July 2041 at 5.696 percent, compared with 5.893 percent when similar-maturity debt was sold on Dec. 13.
The yield on Spain’s 10-year bond rose 10 basis points to 5.12 percent, after falling to 5 percent.
Volatility on Greek bonds was the highest in euro-region markets today, followed by those of Belgium and Austria, according to measures of 10-year or equivalent maturity debt, the yield spread between two- and 10-year securities, and credit default swaps.
German bunds handed investors a loss of 1.2 percent this month through yesterday and France’s declined 1.1 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds returned 1.8 percent.