German Yields Fall Most in Two Weeks as Recession Deepens

Germany’s bonds rose, with two-year yields falling the most in almost two weeks, as data showed the euro-area recession deepened more than economists predicted, spurring demand for the region’s safest assets.

Benchmark 10-year bund yields dropped from within a basis point of the highest level in more than a week as separate reports showed gross domestic product in France and Germany also declined. French and Dutch bonds advanced as European Central Bank Vice President Vitor Constancio said that negative deposit rates are “always possible” if needed. The European Financial Stability Facility sold 1 billion euros of bonds maturing in April 2037 through banks.

“The weaker-than-expected performance of the euro-zone economy in the fourth quarter will trigger further downward revisions of 2013 GDP growth forecasts,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Constancio has also said that the ECB is technically prepared for negative interest rates and that these are possible any time. The commentary is crucial as we have seen a parallel downmove in German yields.”

Germany’s 10-year bund yield fell three basis points, or 0.03 percentage point, to 1.64 percent at 4:50 p.m. London time. It climbed to 1.70 percent yesterday, the highest since Feb. 4. The 1.5 percent security due in February 2023 rose 0.295 or 2.95 euros per 1,000-euro ($1,333) face amount, to 98.73.

The two-year note yield dropped four basis points to 0.18 percent, after falling as much as five basis points, the biggest intraday decline since Feb. 1.

Constancio Comments

The ECB is “technically ready” to reduce its deposit rate below zero, Constancio said in Brussels today. “It’s not clear cut. It’s a possibility,” he said.

The ECB’s deposit rate is currently at zero percent. The Frankfurt-based central bank usually moves its three interest rates in tandem. Policy makers kept the main refinancing rate at a record-low 0.75 percent at a Feb. 7 meeting.

Gross domestic product in the 17-nation region fell 0.6 percent in the fourth quarter from the previous three months, the European Union’s statistics office in Luxembourg said today. That’s the worst performance since the first quarter of 2009 and exceeded the 0.4 percent median forecast of economists in a Bloomberg survey.

The data “reminds us that Europe isn’t an economic powerhouse,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The improvement in sentiment is still overshadowing this data.”

Growth Data

German GDP contracted 0.6 percent from the third quarter, when it gained 0.2 percent, the Federal Statistics Office in Wiesbaden said earlier today. That compares with a median forecast of a 0.5 percent drop in a Bloomberg survey. The French economy also shrank more than forecast, with GDP falling 0.3 percent in the fourth quarter.

Dutch 10-year bond yields declined two basis points to 1.86 percent. The rate on similar-maturity French bonds also dropped two basis points, to 2.26 percent.

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

The EFSF, Europe’s temporary bailout fund, sold 25-year securities at 45 basis points more than the mid-swap rate, implying a yield of 2.959 percent, it said in an e-mailed report today.

German government bonds 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. Italian debt returned 1.2 percent and Spanish securities gained 2.2 percent.