BS: German Two-Year Yields Approach Record Low Amid Growth Concern
By Emma Charlton and Keith Jenkins
Dec. 23 (Bloomberg) -- German two-year note yields were within two basis points of a record low as a report showed the French economy expanded less than initially estimated, underscoring concern that European growth is stalling.
French 10-year government bonds rose after the nation’s statistics office in Paris said France’s economy grew 0.3 percent in the third quarter, revising down a previous reading of 0.4 percent. The euro-region economy will stagnate next year after a 1.6 percent expansion in 2011, Bloomberg surveys show. Italian 10-year government bonds snapped a two-day decline, pushing yields down from near the 7 percent level that forced Greece, Ireland and Portugal to request international bailouts.
“Fundamentals for the euro region have deteriorated,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “We have seen a slowing of the economy and that’s helped bunds do very well.”
German two-year note yields were one basis point lower at 0.21 percent at 12:03 p.m. London time. They dropped to a record low 0.202 percent on Dec. 20. The 0.25 percent securities due in December 2013 rose 0.025, or 25 euro cents per 1,000-euro ($1,307) face amount, to 100.07. Ten-year yields were also one basis point lower, at 1.93 percent.
Growth prospects in Europe have worsened since September, U.K. central bank Governor Mervyn King said yesterday after a risk assessment by regional officials. The European Central Bank cut its 2012 euro-area growth forecast this month to 0.3 percent.
European Summits
Ten-year German rates have dropped about 1 percentage point this year as the euro-region debt crisis deepened, boosting demand for assets perceived to be the safest. Fifteen European summits in two years have produced five plans that failed to stop turmoil that started in Greece from threatening Italy, Spain and France.
The yield on the French 10-year bond fell seven basis points, or 0.07 percentage point, to 3.0 percent, with two-year yields five basis points lower at 0.93 percent. Italy’s 10-year yields dropped two basis points to 6.89 percent. They have advanced more than 2 percentage points this year amid concern the nation won’t be able to meet its funding needs.
Spanish two-year note yields were little changed at 3.64 percent. The securities headed for a weekly drop amid fading optimism that the ECB’s three-year loans to banks will restore confidence in sovereign borrowers. Euro-region lenders took 489 billion euros from the Frankfurt-based ECB in 1,134-day loans on Dec. 21, more than economists predicted.
‘Quasi-Religious Discussions’
Unlike the Federal Reserve and the Bank of England, the ECB has offset liquidity created by purchases of government bonds so that such operations don’t stoke inflation, unlike the U.S. and U.K.’s so-called quantitative easing programs. ECB Executive Board member Lorenzo Bini Smaghi said that policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region.
“I do not understand the quasi-religious discussions about quantitative easing,” Bini Smaghi, who will leave his post at the end of the month, said in an interview published yesterday by the Financial Times. The ECB confirmed the comments. “It is appropriate if economic conditions justify it, in particular in countries facing a liquidity trap that may lead to deflation.”
The ECB lowered its key rate by 25 basis points on Dec. 8, matching an all-time low of 1 percent. It also loosened collateral rules so that banks can borrow more from the ECB.
‘Room to Cut’
“In a nut shell what Bini Smaghi said is that there’s more the ECB can do,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets in London. “We’ve seen the ECB being relatively active in recent months, which is a good thing. On the macroeconomic side things are awful. Bund yields will stay low, the ECB has room to cut rates more.”
Slovenia had its local- and foreign-currency government bond ratings cut by one level to A1 from Aa3 by Moody’s Investors Service, which cited factors including the strain on government finances from the possible need for support for local banks. The outlook is negative, the ratings company said yesterday in a statement.
The yield on the 4.375 percent bond maturing in January 2021 was 23 basis points lower at 7.04 percent.
German government bonds have returned 9 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. French debt has returned 4.4 percent, Spanish debt has gained 5.1 percent and Italian bonds have fallen 5.8 percent, the indexes show.
--Editors: Matthew Brown, Daniel Tilles
To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
