BLBG: European Bonds Gain as Stocks Slump on Concern About Recession
By Agnes Lovasz
Oct. 16 (Bloomberg) -- European government bonds advanced as stocks slumped on concern the deepening credit-crisis will push the global economy into a recession, spurring demand for the safest assets.
The gains sent two-year note yields to the lowest level in a week after UBS AG, Switzerland's biggest bank, said it will raise 6 billion francs ($5.2 billion) in capital from the government and put as much as $60 billion of toxic assets in a fund backed by the central bank. Asian equity markets tumbled, sending Japan's Nikkei 225 Stock Average down more than 10 percent after U.S. retail sales fell more than estimated yesterday.
``The bailout measures and rescue packages will help avoid the ultimate banking crash but it won't prevent the global economy from entering a recession, possibly a severe recession,'' said Kornelius Purps, a fixed-income strategist in Munich at Unicredit Markets and Investment Banking, a unit of Italy's largest lender. ``This is driving investors out of equities and into government bonds. There are expectations of economic weakness and lower interest rates.''
The yield on the two-year note fell 16 basis points to 2.96 percent by 7:40 a.m. in London, the lowest level since Oct. 10. The price of the 4 percent security due September 2010 increased 0.29, or 2.9 euros per 1,000-euro ($1,336) face amount, to 101.86.
The yield on the 10-year German bund, Europe's benchmark government security, declined 4 basis points to 4.08 percent. Yields move inversely to bond prices.
The MSCI Asia Pacific Index of stocks lost 8.4 percent today, the biggest drop on record. South Korea's Kospi Index slumped 9.4 percent and the won slid as much as 12 percent after Standard & Poor's said it may downgrade the credit rating of the nation's banks. Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, lost 5.8 percent.
European bonds handed investors a 1 percent return since the end of August, while U.S. Treasuries returned 0.4 percent, according to Merrill Lynch & Co.'s EMU Direct Government and Treasury Master indexes.
To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.netAndrew MacAskill in London at amacaskill@bloomberg.net
