German Yields Drop to Record as China Boosts Bonds Around World

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Gains in developed-nation government bonds pushed the yield on German two-year notes to a record low as China’s devaluation of the yuan added to concern the world’s second-largest economy is faltering and will curb global growth.

U.S. Treasuries climbed with U.K. sovereign securities as the People’s Bank of China cut its reference rate for the yuan for a second day. Japanese 10-year yields fell to the lowest level in three months, while Australia’s dropped the most in a month.

Bonds are benefiting as the dimmed outlook for the global economy encourages investors to reduce bets on higher interest rates from central banks. Odds the Federal Reserve will raise borrowing costs next month dropped to 40 percent, while the Bank of England won’t move until August next year, options pricing indicates.

“Markets have turned 180 degrees,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “At the beginning of the week the Fed and rate hike expectations caused yields to rise, now concerns about China are triggering the opposite.”

Negative Yield

Germany’s two-year yield dropped to minus 0.284 percent at the 5 p.m. London close, the lowest end-of-day rate since Bloomberg began collecting the data in 1990. The price of the zero percent note maturing in June 2017 was at 100.525 percent of face value.

A negative yield means investors buying the securities now will get back less than they paid when the debt matures.

Germany’s 10-year bund yield dropped three basis points, or 0.03 percentage point, to 0.61 percent. The nation sold 3.2 billion euros ($3.6 billion) of 10-year bunds in an auction on Wednesday with an average yield of 0.61 percent, the lowest since April. The bid-to-cover ratio rose to 1.3 from 1.1 at a previous sale in July.

Treasury 10-year note yields slid five basis points to 2.09 percent and U.K. gilt yields fell two basis points to 1.79 percent.

Spanish 10-year bonds ended the day lower, with yields rising four basis points to 1.98 percent.

Gains pared “partly because we’ve rallied quite hard over the last few days, while supply in Germany and the U.S. today may also be weighing on the market,” said Daniela Russell, a rates strategist at Credit Suisse Group AG in London. “It’s also important to note that the supply in the U.S. is particularly heavy this week.”

(An earlier version of this story corrected the bid-to-cover ratio of the previous auction in the seventh paragraph.)