Euro-Area Bonds Rise as Rates on Overnight Loans Approach Zero

European bonds from France to Italy rose as tumbling rates on short-term loans showed banks were willing to lend cash to one another for almost no fee.

Spain’s 10-year bonds pared a weekly decline as the rate on derivatives tied to overnight loans between banks fell toward zero. Money-market yields are sliding after the European Central Bank last week announced a range of stimulus measures, including charging lenders to deposit cash, effective June 11, to stave off the threat of deflation in the euro area. That’s boosting demand for the higher return available on government bonds.

“Front-end anchoring and negative rates that the ECB gave us last week is getting increasingly priced in,” said Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “The longer you have excess liquidity in the system, the more there is a risk of a technical lower-rate environment.”

French 10-year yields fell three basis points, or 0.03 percentage point, to 1.73 percent at 4:56 p.m. London time. The 2.25 percent bond maturing in May 2024 rose 0.235, or 2.35 euros per 1,000-euro ($1,353) face amount, to 104.70.

The one-week Eonia swap rate, a gauge of the cost for banks to lend to each other in euros, fell to 0.004 percent, according to ICAP Plc data. That’s down from this year’s high of 0.306 percent on May 22, based on closing-market data.

The rate indicates banks are willing to make loans at almost no cost for the borrower, rather than face the higher penalty of 0.1 percent for keeping excess funds at the ECB.

Crisis Over

Investors have snapped up higher-yielding euro-area securities this year on signs the region’s debt crisis has been consigned to history. The ECB’s June 5 stimulus package added further fuel to the rally, prompting Spain to sell 9 billion euros of a new 10-year bond via banks yesterday, including an exchange for shorter-dated notes. Italy auctioned three-year debt at a record-low yield. Spain also plans to sell three- and five-year debt next week.

Italy’s 10-year yield fell four basis points to 2.78 percent. Spain’s dropped four basis points to 2.66 percent, compared with the close on June 6 of 2.64 percent.

Benchmark German 10-year yields fell three basis points to 1.36 percent. Two-year rates were little changed at 0.03 percent after touching 0.025 percent, matching the lowest level since May 28, 2013.

German securities earned 3.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s returned 8.4 percent, Spain’s 9.3 percent and those of France gained 5 percent.

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