London: German government bonds advanced last week, leaving yields within two basis points of a record low, as concern that the sovereign-debt crisis will spread fuelled demand for the Euro region's safest securities.
The yield premium investors demand to hold Spanish or Italian 10-year bonds rather than German government bonds reached the widest since the euro was introduced in 1999. The European Central Bank said May 31 the region's lenders will have to write off 195 billion euros (Dh856.5 billion) of bad debts by 2011 and their ability to sell bonds may be curtailed as governments finance deficits.
"Fears of risk contagion is driving demand for bunds," said Harvinder Sian, senior bond strategist at Royal Bank of Scotland Group Plc in London. "It's a flight to quality. The world doesn't look such a happy place." The yield on Germany's 10-year bund, Europe's benchmark government security, fell nine basis points in the week to 2.58 per cent in London on Friday. The two-year note yield slipped three basis points to 0.48 per cent.
Concern that the European sovereign-debt crisis may force some nations to default and break up the region's monetary union has boosted demand for the area's safest government securities at the expense of so-called peripheral nations. That prompted European leaders to announce a rescue plan last month that included bond purchases by the European Central Bank. The 10-year yield declined to 2.56 per cent on May 25, the lowest since Bloomberg began collecting the data in 1989.
Speculation the debt crisis may still spread further has sent the yield premium on some European bonds back to levels last seen before the European Union announced the 750 billion euro plan on May 10.
The yield premium investors demand to hold Italian 10-year securities instead of benchmark German bunds reached 166 basis points on Friday, the most since 1997, based on close-of-day generic data.
