European Bond Gains Push Yields to Record Lows on Iraq Conflict

Europe’s government bonds rose, pushing yields to record lows, as U.S. President Barack Obama’s authorization of air strikes in Iraq heightened geopolitical risks and fueled demand for fixed-income securities.

German two-year rates dipped below zero for a second day as conflict in Iraq coincided with tensions in Ukraine and Gaza that boosted the safest fixed-income securities this month and prompted a slump in higher-yielding assets. European Central Bank President Mario Draghi said yesterday risks to growth from conflicts are increasing. Yields on 10-year debt from Finland to France dropped to records, while Italian and Spanish securities pared weekly declines.

“The move in core government bonds is on geopolitical issues and that probably feels right on the day,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in London. “This is no different to the flows we’ve seen recently with decent buying of the back-end and front-end of the government bond curves.” A yield curve is a chart showing rates on bonds of different maturities.

Benchmark German 10-year yields fell one basis point, or 0.01 percentage point, to 1.05 percent as of 4:24 p.m. London time after dropping to 1.023 percent, the least since Bloomberg began tracking the data in 1989. The 1.5 percent bund due in May 2024 rose 0.1, or 1 euro per 1,000-euro ($1,342) face amount, to 104.14. Two-year notes yielded 0.009 percent after the rate dropped to minus 0.005 percent, the least since May 23, 2013.

A negative yield means investors who hold a security until it matures will receive less than they paid to buy it.

Obama Directive

Obama authorized limited air strikes against Sunni militants in Iraq and said that they would be used to protect U.S. personnel and Yezidis, a minority sect concentrated in northern Iraq, who have been targeted by insurgents.

The U.S. Treasury 10-year yield fell three basis points to 2.38 percent after dropping to 2.35 percent, the lowest level since June 2013.

ING’s Garvey recommended using the widening in yield spreads of Spanish and Italian securities this week relative to German bunds to re-enter positions betting on the higher-yielding securities outperforming.

Italy’s 10-year yield fell four basis points to 2.84 percent, with the difference to German bunds widening 16 basis points in the week to 1.79 percentage points.

The yield on Spain’s 10-year debt dropped five basis points to 2.58 percent. The spread versus bunds has widened 10 basis points this week, to 1.53 percentage points.

“There’s been liquidation of Spanish and Italian” debt, Garvey said. “To see this in the price action is no surprise, we just needed a catalyst.”

France’s 10-year yield dropped as much as five basis points to 1.441 percent and Finland’s fell to as low as 1.178 percent, both the least on record.

It doesn’t make sense for insurers to invest in German bunds at a yield of 1 percent, Dieter Wemmer, Munich-based chief financial officer at Allianz SE said in a media call today.

German securities earned 6.2 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 10 percent, Italy’s 9.3 percent and Treasuries returned 3.9 percent.