German 2-Year Notes Rise as Banks Cut ECB Loan Repayments

Germany’s two-year notes rose for a second day after the European Central Bank said financial institutions planned fewer repayments of three-year loans next week, curbing optimism that the debt crisis is abating.

Yields fell after the ECB said banks planned to repay 3.5 billion euros ($4.8 billion) of three-year loans next week, compared with 137.2 billion euros this week. The first opportunity for banks to repay money from the second tranche of cheap loans, which amounted to 529 billion euros, is Feb. 27. Euribor futures contracts climbed, while Spanish and Italian 10-year bonds dropped.

“Today’s number shows that less liquidity is going to be withdrawn from the system,” pushing up German notes, said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International. “The big number came out a week ago and it was interpreted positively because it was a lot more than anticipated. It appears if you could repay, you have repaid.”

Germany’s two-year yield fell two basis points, or 0.02 percentage point, to 0.25 percent at 4:55 p.m. London time after dropping as much as five basis points. The rate climbed to 0.32 percent on Jan. 28, the highest since March 21. The zero percent security maturing in December 2014 rose 0.04, or 40 euro cents per 1,000-euro face amount, to 99.54.

The 10-year bund yield dropped one basis point to 1.67 percent after falling to 1.63 percent.

The implied yield on the December 2013 Euribor futures contract fell three basis points to 0.53 percent.

Safety Demand

“There’s a little bit of stabilization in the bund market, with a hint of flight to safety,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “We’ve had a decent selloff in bunds so far this year, and now there’s a bit of stabilization.”

U.S. employers added 157,000 jobs in January following a revised 196,000 advance in the prior month and a 247,000 surge in November, Labor Department figures showed today in Washington. The revisions added 127,000 jobs to the employment count in November and December. The jobless rate increased to 7.9 percent from 7.8 percent.

Spanish 10-year government bond yields rose two basis points to 5.21 percent. The rate on similar-maturity Italian securities added two basis points to 4.33 percent.

Volatility on German bonds was the highest in euro-area markets, followed by those of Portugal and Finland, according to measures of 10-year or similar-maturity debt, the yield spread between two- and 10-year securities, and credit-default swaps.

German bunds have handed investors a loss of 1.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds returned 2 percent, and Italian securities gained 1.5 percent.

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