EURO GOVT-German yields turn negative as investors seek haven

Mon Nov 5, 2012 7:20am EST

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* Schatz yields turn negative, Bund futures at 2-month high

* U.S. election effects uncertain, Greek risks on the rise

* Spanish bond yields climb after bond auction surprise

By William James

LONDON, Nov 5 (Reuters) - Two-year German bond yields fell below zero on Monday as low-risk assets rallied before an uncertain U.S. presidential election and another make-or-break parliamentary vote in Greece.

The Greek government presents an unpopular austerity package to parliament on Monday and must win a vote on it on Wednesday to keep international aid payments on track and stave off the threat of bankruptcy.

German bonds, seen as the lowest risk in the euro zone, rallied as investors bought secure and liquid assets to protect against the risk of a surprise vote against the Greek cuts.

Two-year yields fell to -0.01 percent -- the first time the debt has traded with a negative yield since early September. Bund futures rose 26 ticks to 142.13.

"Against this backdrop market participants are a little bit worried about the next moves in the euro zone epic," said Marius Daheim, chief strategist at Bayerische Landesbank.

"If political decisions in Athens cause the next tranche of aid not to be paid out... then people would be looking at contagion effects once again and reassessing their current view that the crisis is contained."

Uncertainty over the Greek vote hit appetite for lower-rated debt across the bloc and bonds issued by Spain, seen as the next country to need a bailout, struggled. Ten-year Spanish yields rose 8 basis points on the day to 5.76 percent.

Traders said Friday's ambitious announcement of plans to launch a new five-year Spanish bond and tap 20-year paper later in the week had caught some off guard and prompted selling.

Confirmation that the European Central Bank was reviewing the terms on which it lent against Spanish securities also soured sentiment.

LIGHT POSITIONING

In the run-up to Tuesday's U.S. election trading activity was expected to be muted and biased towards a shift into safe havens due to the risk of a change in the direction of fiscal and monetary policy in the world's largest economy.

Markets lacked a clear consensus over whether a win for Democratic incumbent Barack Obama would be positive or negative for U.S. bonds, but euro zone debt prices were expected to track any knee-jerk shift in Treasuries whether he or Republican challenger Mitt Romney wins.

"The market is pretty dead at the moment and I would expect it to stay that way until we get the U.S. elections out of the way. On Wednesday morning, I'd expect Bunds to be doing whatever Treasuries are doing - it's as simple as that," a trader said.

Until the election, the outlook for euro zone bonds was more likely to be dominated by technical factors and the latest flashpoint in Greece's battle to get a grip on its debt, traders said.

The 142 level in Bund futures has provided tough resistance over the last six weeks and the market would have to close above it for technical charts to signal further price rises were on the way.

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