Spanish and Italian government bonds rallied, paring a slump for the week, on speculation the European Central Bank will buy the securities to help prevent the currency bloc from disintegrating.
German, US and UK yields fell to all-time lows earlier after Spanish Economy Minister Luis de Guindos said the future of the euro is at stake and a report showed US employers added the smallest number of workers in a year in May. German two-year note yields fell below zero for the first time and 10-year yields on Austrian, Belgian, Dutch, Finnish and French bonds dropped to records.
“The markets are so jumpy that even the slightest rumor of policy action would ensure profit-taking on short Spanish government bond positions,” said John Davies, a fixed-income strategist at WestLB AG in London, referring to bets that prices will decline. “But if we were really getting strong speculation that the ECB was intending to step in I think we would be down 30 or 40 basis points.”
Spanish 10-year government bond yields fell five basis points, or 0.05 percentage point, to 6.51 per cent at 4:41 p.m. London time. The 5.85 per cent securities maturing in January 2022 rose 0.335, or 3.35 euros per 1,000-euro ($1,239) face amount, to 95.325. Italian 10-year bond yields dropped 16 basis points to 5.74 per cent.
An ECB spokesman in Frankfurt declined to comment on the prospects of debt purchases when reached by phone today.
The German two-year yield slid to as low as minus 0.012 per cent, the first time the rate on the securities has been negative, according to data compiled by Bloomberg, before recovering to 0.01 per cent.
A yield below zero means investors will receive less in repayments on the German securities when held through to maturity than the amount they paid to buy them.
Danish and Swiss two-year rates were also negative, according to data compiled by Bloomberg.
“It was only a matter of time, given the stressed environment that we're in in the euro area, that we saw a drop to slightly negative levels,” Norbert Aul, a fixed-income strategist at Royal Bank of Canada in London, said, referring to German two-year yields. “If the 10-year yield falls to as low as 1 per cent, then everything out to three years has the potential to go negative.”
The 10-year bund rate dropped three basis points to 1.17 per cent after reaching 1.127 per cent, the lowest since Bloomberg began collecting the data in 1989. The seven-week advance for the securities is the longest run since May 27 last year. Five- year yields reached an all-time low of 0.295 per cent and 30-year bond yields touched 1.629 per cent. Yields on UK gilts of all maturities dropped to less than 3 per cent for the first time. The US Treasury 10-year note rate declined to as low as 1.4387 per cent.
“The morning was simply an extension of the major trend we are in,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Despite the bad jobs data, there was always going to be some strong profit taking” because of the risk of policy-maker action during the weekend, he said.
US nonfarm payrolls climbed by 69,000 last month, less than the most-pessimistic estimate in a Bloomberg News survey, after a revised 77,000 gain in April, Labor Department figures showed today in Washington. The jobless rate rose to 8.2 per cent from 8.1 per cent, while hours worked declined.
Euro-area unemployment reached 11 per cent in April and March, the highest rate on record, the European Union's statistics office in Luxembourg said.
The euro area is in real danger of disintegrating unless policy makers revamp the bloc's fiscal ties, said Olli Rehn, the European Commission's Economic and Monetary Commissioner .
“The way things are going and under the current structures, the euro area has a significant risk of breaking up,” Rehn said in a speech in Helsinki. “We're either headed for a deterioration of the euro area or a gradual strengthening of the European Union.”
Italian 10-year yields were still set for a nine basis- point increase on the week, with Spain's yields on similar- maturity debt was 21 basis points higher.
Thailand, which shares Italy and Spain's BBB+ rating at Standard & Poor's, has 10-year borrowing costs of 3.65 per cent.
“I don't know if we're on the edge of the precipice, but we're in a very, very, very difficult situation,” Spain's de Guindos said yesterday.
Volatility on Irish government bonds was the highest in developed markets today followed by Belgium, France and Austria, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.
French 10-year yields dropped as much as 29 basis points to as low as 2.07 per cent. The rate on similar-maturity Austrian debt fell to 1.919 per cent, Belgian yields tumbled to 2.743 per cent, Dutch 10-year rates retreated to 1.486 per cent, and Finnish yields declined to 1.385 per cent, all the lowest on record.
A gauge of euro-area manufacturing decreased to 45.1 in May from 45.9 in April, London-based Markit Economics said today. The index for Spain fell to 42, from 43.5. A figure below 50 indicates a contraction.
German debt has returned 4.7 per cent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities have lost 5.2 per cent, and Italian bonds rose 6.8 per cent, the indexes show. Treasuries earned 2.2 per cent, with gilts making 3.1 per cent.