Bund Yields Drop Most in Six Weeks as Recession Spurs Safety Bid

German government bonds rose, with 10-year yields dropping the most in six weeks, as reports showing the euro-area economy contracted and inflation slowed underpinned demand for the region’s safest securities.

Germany’s two-year yields dropped below zero and approached the lowest level this year as the Federal Statistics Office said the nation’s economy cooled last quarter. Austrian, Dutch and Belgian securities also gained. Spanish and Italian bonds trimmed weekly declines after the nations were successful in selling 13 billion euros ($16.7 billion) of debt via banks.

“The economic data was disappointing, the only good news was that Germany was still growing, though slower than the market expected,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “It will take some time until all the other European economies come out of recession and because of that everybody was looking for bunds, or safe havens again, despite the low yield.”

Germany’s 10-year yield dropped five basis points, or 0.05 percentage point this week, to 1.33 percent, the biggest decline since the period ended April 5. The 1.5 percent bund maturing in February 2023 gained 0.49, or 4.90 euros per 1,000-euro face amount, to 101.575.

The two-year note yield fell eight basis points to minus 0.029 percent after dropping to minus 0.045 percent on May 3, the lowest level since Dec. 28. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

Longer Recession

Euro-area gross domestic product shrank 0.2 percent in the first quarter, after falling 0.6 percent in the previous three months, the European Union’s statistics office said May 15. Annual consumer price inflation slowed to 1.2 percent in April, from 1.7 percent in March, the office said the following day, confirming an April 30 estimate.

The bonds of other so-called core nations also gained this week. Austria’s 10-year yield fell nine basis points to 1.69 percent, while similar-maturity Dutch yields dropped seven basis points to 1.64 percent and Belgium’s declined eight basis points to 2 percent.

Spanish and Italian securities trimmed declines amid speculation investors’ view of the two countries is improving after Spain sold 7 billion euros of 10-year bonds through banks on May 14 and Italy allotted 6 billion euros of 30-year debt the following day.

Spain’s syndication attracted bids for more than 21 billion euros of debt, according to a person with knowledge of the deal. Italy garnered 12.7 billion euros of bids for its 30-year bonds, a person close to the transaction said.

Spain’s 10-year yield rose less than one basis point this week to 4.21 percent after being as much as 21 basis points higher. Similar-maturity Italian rates ended the week less than a basis point up at 3.90 percent, trimming an earlier increase of 19 basis points.

Germany’s bonds returned 0.4 percent this year through May 16, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities gained 7 percent and Italy’s earned 4.5 percent.

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