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July 18, 2012 5:39 pm
Germany sold two-year bonds at a negative yield for the first time on record on Wednesday, as the borrowing costs of Europe’s more creditworthy nations were driven even lower by investors seeking safety.
The auction of €4.2bn of Schatz bonds maturing in June 2014 resulted in an average yield of minus 0.06 per cent, the Bundesbank said in a statement, while the composite five-year German bond yield fell to a record low of 0.254 per cent.
Although German government bonds have been one of the favoured investments of investors seeking shelter from the eurozone crisis – continually pushing yields across the curve to record lows this year – the low or negligible returns on offer have spurred investors into Europe’s “soft core” in recent weeks.
Investor flows into the bonds of eurozone countries such as Austria, the Netherlands, France and Finland were given further impetus by the European Central Bank’s recent interest rate cut.
The central bank cut its benchmark interest rate to 0.75 per cent and lowered its deposit rate to zero on July 5. This caused a “grab for yield” in European bond markets that are considered moderately safe, but still offer returns higher than are available in German Bunds, investors and strategists say.
France’s 10-year bond yield hit a record low of 2.065 per cent on Wednesday, a sharp reversal from last autumn, when the continent’s crisis threatened to spread to the eurozone’s second-largest economy.
However, the primary beneficiaries from the ECB’s move to stop paying interest on deposits at the central bank have been shorter-term bonds and bills of the remaining higher-rated European countries.
The two-year bond yields of Switzerland, Denmark, Germany, Finland, the Netherlands and most recently Austria are now all negative and France’s two-year yield is only 9 basis points away from hitting zero.
Even Belgium, one of the continent’s more indebted countries, which has often been paralysed by political wrangling, can now borrow for about 0.25 per cent for two years.
Belgium and the European Financial Stability Facility, one of the eurozone rescue funds, sold shorter-term bills at a negative yield for the first time on Tuesday.
In addition to the recent rate cut and a desire for safety in highly rated debt, the low or negative yields have been caused by investors seeking a hedge, or protection, against the possibility of the eurozone unravelling.
Some investors argue that if the common currency area were to break up, countries such as Germany, Finland and Austria would redenominate their debts into a stronger currency, while non-eurozone countries such as Denmark and Switzerland would be forced to abandon their attempts to keep their currencies from appreciating against the euro.
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