German Bonds Rally as Japan Nuclear Threat Stokes Safety Demand
March 15 (Bloomberg) — German government bonds surged as the threat of nuclear fallout in Japan added to concern that damage from the nation’s biggest earthquake will hinder the global economic recovery, stoking demand for the safest assets.
The gains pushed ten-year bund yields down by the most in almost two years after Japanese Prime Minister Naoto Kan warned today that the danger of further radiation leaks was increasing following a third blast at the quake-hit Fukushima Dai-Ichi nuclear plant north of Tokyo. Two-year notes extended their longest winning streak in 16 months as investors pared bets for higher interest rates in the euro region and a gauge of future German investor confidence unexpectedly fell in March.
“People are bracing for the worst-case scenario,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. Events in Japan “are being seen as a growth negative. People are moving out of equities and where do you put your money? You put it in government bonds.”
Yields on 10-year bunds declined 12 basis points to 3.11 percent as of 10:52 a.m. in London. Yields earlier fell as much as 15 basis points, their biggest intraday drop since March 2009. The 2.5 percent security due January 2021 rose 0.965, or 9.65 euros per 1,000-euro ($1,390) face amount, to 94.93. Two- year notes rose for an eighth day, sending yields down 13 basis points to 1.51 percent.
Japan’s benchmark equity index completed its worst two-day plunge since the 1987 market crash and commodity prices fell as the threat of disruption to the world’s third-biggest economy undermined optimism about the global recovery. The March 11 temblor in Japan and subsequent tsunami is estimated to have killed more than 10,000 people and shut down factories belonging to companies including Sony Corp.
“Flight-to-quality moves are now accelerating in financial markets,” Koji Shimamoto, chief strategist in Tokyo at BNP Paribas SA, wrote in a client note today. “Over the near term, equity prices will plunge and bonds will rally.”
Two-year German notes extended their longest run of gains since a nine-day rally ended Nov. 17, 2009 as investors reduced bets that the European Central Bank will lift borrowing costs next month. Forward contracts on the euro overnight index average, or Eonia, for the day of the next ECB interest-rate decision fell four basis points to 0.9195 percent, according to data from Deutsche Bank AG.
German notes due 2013 have gained every session since March 4, reversing losses sparked by European Central Bank President Jean-Claude Trichet’s signal the previous day that policy makers may raise interest rates as soon as next month.
“There is still a decent chance of a rate hike priced in, but it’s fallen away from the highs immediately after the ECB meeting,” said Benjamin Schroeder, a rate strategist at Commerzbank AG in Frankfurt. “The expectation for an aggressive ECB rate path later in the year is being priced out.”
Euribor futures jumped today, sending the implied yield on the contract expiring in December down 13 basis points to 1.895 percent, signaling traders reduced bets for higher rates in the euro area.
The ZEW Center for European Economic Research in Mannheim, Germany, said today that its index of investor and analyst expectations, which aims to predict confidence levels six months in advance, fell to 14.1 this month from 15.7 in February. That was lower than the 15.9 reading forecast in a Bloomberg survey.
Peripherals Bonds Lag
Gains in so-called peripheral euro-area bonds trailed bunds as European governments remained divided over how to boost a rescue fund for the region’s most indebted nations, detracting from a pledge announced last weekend to resolve the sovereign- debt crisis. The yield on Spanish 10-year bonds declined seven basis points, leaving the yield spread over benchmark bunds 3.9 basis points wider at 2.08 percentage points.
Spain sold 5.5 billion euros of 12-month and 18-month bills at an auction today, the Bank of Spain said, compared with a maximum target of 6 billion euros.
Belgium postponed a sale of six-year bonds, citing market volatility caused by the nuclear threat in Japan. The country today sold 1.804 billion euros of 12-month bills at an average yield of 1.526 percent, compared with 1.542 percent at an auction two weeks ago. Investors bid for 1.83 times the amount of notes offered, down from 1.88 at a Feb. 15 sale.
Ten-year Belgian bonds rose for a fourth day, reducing yields by almost 10 basis points to 4.05 percent.
Italian 10-year bond yields were nine basis points lower at 4.70 percent, while the rate on Portuguese bonds maturing in 2021 dropped three basis points to 7.41 percent.
Ten-year Greek bonds fell, raising yields by seven basis points to 12.51 percent. Irish 10-year bond yields slid five basis points to 9.44 percent, leaving the yield premium over similar-maturity German debt six basis points wider than yesterday’s close at 6.33 percentage points.