EURO GOVT-Two-year German yields hit 4-mth low on ECB rate bets

Fri Dec 7, 2012 11:49am EST

Related Topics

* Schatz yield hits lowest since August
    * Expectations rise of ECB deposit rate cut
    * More recent peripheral weakness considered a correction


    By Ana Nicolaci da Costa and Marius Zaharia
    LONDON, Dec 7 (Reuters) - German two-year bond yields dipped
to four-month lows on Friday on bets the European Central Bank
could cut interest rates further, reinforced by gloomy growth
forecasts for the euro zone's largest economy.
    Germany's Bundesbank slashed its growth outlook for next
year to 0.4 percent, down from a June forecast of 1.6 percent.
The move comes a day after the European Central Bank also cut
its growth estimates for 2013 and its president Mario Draghi
said the bank discussed negative deposit rates. 
    Some money market rates turned negative in a sign that
investors saw a deposit rate cut as more likely than previously.
 A negative rate would penalize banks for depositing
money with the ECB and, policymakers hope, force them to put
their money to work elsewhere. 
    Two-year German yields fell as low as minus
0.084 percent, their lowest since August and meaning investors
buying the assets are paying for the privilege of parking their
money in a safe haven. 
    "They (the ECB) wanted to open the door for a rate cut,"
said Marius Daheim, chief strategist at Bayerische Landesbank.
    "We've seen two-year yields at minus 0.1 percent earlier
this year. I guess they can fall to that level again but we
speak to clients and we ask whether they would buy German debt
at negative yields and most of them say they wouldn't."
    Ten-year German yields were flat at 1.30
percent and German Bunds settled little changed on the
day as a better-than-expected American jobs report for November
capped the upside for safe-haven bonds..   
    Nonfarm employment increased by 146,000 jobs last month, the
Labor Department said on Friday, defying expectations of a sharp
pull back related to superstorm Sandy. 
      
    PERIPHERAL ADJUSTMENT
    The prospect of central bank support has led to a sharp drop
in Italian and Spanish yields in recent months, even though
neither country has asked for aid - the prerequisite for ECB
bond-buying. 
    This week investors used a disappointing Spanish auction and
political tension in Italy as an excuse to take profit on that
bond rally. Some analysts did not expect this to be the
beginning of a sharp sell-off..
    Silvio Berlusconi's centre-right People of Freedom party
pledged on Friday not to trigger a disorderly crisis that could
alarm financial markets, after the party's withdrawal of support
from Prime Minister Mario Monti put pressure on Italian debt.
  
    "It was quite easy to get a little bit of a correction after
the massive rally that we've had in the last month. So I think
it's just a pull-back in a bullish market and it's a buying
opportunity at this stage," David Keeble, global head of fixed
income strategy, at Credit Agricole said.
    Ten-year Italian yields were down slightly at
4.53 percent, while Spanish borrowing costs over ten years
 were flat at 5.48 percent in late European
trading.
    "We want to be in the periphery - but not huge. We think
there is going to be a little bit of a risk-on trade next year
once you get the fiscal thing sorted in the U.S.," Keeble added.
"You want to be in the short end, and you want to be in the
periphery."
    U.S. budget talks aimed at reaching a deal to avert spending
cuts and tax increases to be triggered early next year
continued..
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