German Two-Year Yields Fall to Record as Haven Demand Persists

  • Notes gain for fourth day as Le Pen rises in French polls
  • Spread to Treasuries at widest since 2000 on policy divergence

German two-year notes climbed for a fourth day, pushing the yield to a record low, as investors sought the region’s safest assets amid growing concern over the outcome of the French presidential election.

The yield spread between the securities and similar-maturity Treasuries touched the widest in almost 17 years as the latest polls showed anti-euro candidate Marine Le Pen narrowing the gap against a second-round competitor.

“People are just afraid to fade the move,” said Alexander Aldinger, an interest-rate strategist at Bayerische Landesbank in Munich. “If we can see some stabilization in political news we will stop at current levels and I can’t see that we’ll reach minus one percent.”

The yield on German two-year notes dropped as much as five basis points to a record minus 0.915 percent. That pushed the spread versus similar-maturity Treasuries to 213 basis points, the most on a closing basis since March 2000.

The European Central Bank’s commitment to its bond-buying program contrasts with expectations for as many as three interest-rate hikes in the U.S. this year, a policy divergence that is also widening the spread between German and Treasury bond yields.

Investors are protected by the ECB at the short-end, and are omitting long-end bets because of steepening risks, Aldinger said. Germany failed to attract enough bids to meet a 1-billion-euro issuance target of 30-year bonds at an auction on Wednesday.

The sharp widening in sovereign spreads within Europe and between Germany and the U.S. is similar to exchange-rate moves during the U.K. and French currency crises of 1992 and 1993, according to Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London.

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