German 10-year bond yields reached the lowest on record and the yield premium investors demand to hold Greek 10-year debt over bunds soared as concern resurfaced that some European countries will struggle to contain deficits. Irish bonds slid after the country’s long-term sovereign credit rating was cut one step to AA- by Standard & Poor’s on concern the cost of supporting its struggling banks is rising. U.S. 10-year yields slid to the lowest since January 2009 as orders for durable goods there increased in July less than economists predicted. Bunds advanced even after a report said German business confidence unexpectedly rose in August. “Ireland is in the firing line after the downgrade and that’s helping German bunds,” said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in London. “Risk aversion is the main theme, with growing worries about the outlook for the U.S. economy and fears that we could go back into recession.” German 10-year bond yields fell nine basis points to 2.1 percent as of 1:34 a.m. in London, a record low. The 2.25 percent security due September 2020 rose 0.78, or 7.80 euros per 1,000-euro ($1,263) face amount, to 101.35. Thirty-year yields slipped as much as 13 basis points to a record 2.647 percent. Irish bonds fell, with the yield on the 10-year bond rising 14 basis points to 5.62 percent. Yield Spread The extra yield investors demand to hold Irish 10-year bonds instead of their German equivalents rose 23 basis points to 341 basis points, setting a record for a second-straight day. The Greek-German yield spread widened 50 basis points to 935 basis points, the first time it had surpassed 900 basis points since the European Union announced a regional rescue plan in May. Investors are concerned the cost of rescuing Anglo Irish Bank Corp. will exceed the maximum 25 billion euros ($32 billion) forecast by the Irish central bank, which is equivalent to 15 percent of the nation’s annual gross domestic product and 75 percent of its tax take. S&P raised its estimate for recapitalizing the banking system to as much as 50 billion euros ($63 billion) from a previous estimate of as much as 35 billion euros. Ireland’s rating is still one notch better than Italy and three above Portugal. It is seven steps higher than Greece’s junk status. “A further downgrade is possible if the fiscal cost of supporting the banking sector rises further,” S&P said in a statement yesterday. Ireland is slated to sell between 400 million euros and 600 million euros worth of bills tomorrow. ‘Flawed’ Analysis Ireland’s National Treasury Management Agency said S&P’s analysis in the downgrade was flawed, and that “investors continue to show strong demand for Irish government debt.” John Corrigan, Chief Executive Officer of Ireland’s NTMA said the country’s banks will be able to refinance themselves. The transfer of loans to the National Asset Management Agency won’t be finalized until the end of the year, he said in an interview with Bloomberg Television today. Yields on bunds, gilts and Treasuries slid this month as data from the U.S. missed estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009. U.S. durable goods orders increased 0.3 percent, compared with the 3 percent median estimate of 75 economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Excluding transportation equipment, demand unexpectedly fell. Plunging Yields Treasuries and gilts jumped yesterday, with the yield on the U.S. 10-year note falling 12 basis points to 2.49 percent. The equivalent-maturity U.K. yield slipped nine basis points to 2.88 percent, after touching a record low 2.85 percent. German government bonds returned 3.3 percent this month, the most since November 2008, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. That compares with 1.9 percent for U.S. Treasuries and 4 percent for U.K. gilts. Portugal sold 1.3 billion euros ($1.65 billion) of 2016 and 2020 bonds, more than it previously indicated. The securities due in October 2016 were issued at an average yield of 4.371 percent, the country’s debt management agency said today. That compares with an average yield of 3.834 percent at a previous auction of six-year debt on Feb. 11, 2009. Today’s auction attracted bids for 2.1 times the amount offered, compared with a bid-to-cover ratio of 2.02 in February 2009. The bonds due June 2020 were issued at an average yield of 5.312 percent. That compares with an average yield of 5.225 percent at a previous auction of debt with the same maturity on June 9. The auction attracted bids for 1.8 times the amount offered, the same bid-to-cover ratio as the June sale. The IGCP, as the debt agency is known, said on Aug. 19 the combined total indicative amount for today’s auction would range from 750 million euros to 1.25 billion euros. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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