WSJ: Bond Investors Flee To Safe Havens After Bank Downgrades

Nervous investors piled into safe haven bonds Friday, pushing short-term German yields close to zero, as a raft of Spanish bank downgrades by Moody’s Investors Service Inc. further jolted sentiment already weakened by fears of a Greek exit from the euro zone.

In the latest sign of the intensifying of the sovereign debt crisis, the yield on the two-year German bond, known as the Schatz, sank to an all-time low of just 0.028%. Many analysts expect Schatz yields to turn negative, meaning investors may soon be paying the German government for the privilege of parking their cash.

Dutch and Swedish bonds, and U.K. gilts also hit record low yields early in the session, while short-dated Italian and Spanish bonds came under pressure before recovering from their early losses.

German Finance Minister Wolfgang Schaeuble said Friday that he expects it to take 12 to 24 months for markets to calm, as the euro zone continues to face a crisis of confidence amid Greek uncertainty.

Moody’s on Thursday cut the credit ratings of 16 Spanish lenders, hot on the heels of its downgrade of 26 Italian banks earlier in the week. The downgrade follows fears of a potential run on Spanish bank Bankia which hit its share price, and highlights the risk to highly indebted governments should they be called upon to backstop insolvent lenders.

“Moody’s announcement will increase speculation that the Iberian state will be forced to ask for external support in order to effectively tackle its banking crisis,” said interest rates strategists at Lloyds Bank WBM.

At 0745 GMT, the Spanish 10-year yield was 6.26%, with Italy at 5.93%, both close to Thursday’s close, according to Tradeweb. Earlier, German 10-year Bunds had hit a record low yield of just below 1.4%, while 10-year gilt yields sank to a touch below 1.8%, also an all-time low.

Schatz yields picked up off their lows to trade at 0.042%, but may yet turn negative.

As fears of another bout of contagion in the euro zone mount, investors are looking to just preserve their principal by parking their funds in German debt. Investors are so nervous about the potential loss of capital that they are willing to pay an interest rate just to protect their money.

Germany benefits from being in a dwindling group of countries with stable triple-A ratings and bond markets that are deep enough to accommodate large flows from investors across the world.

Yields on some German debt have been negative in the past but this would be the first time two-year benchmark yields turn negative, if the move happens.

Yields on treasury bills as well as very short-dated bonds turned negative in November as banks piled into German debt in a bid to preserve the quality of their balance sheets ahead of the year-end. Interest rates in Switzerland have been in negative territory for some time, while U.S. Treasury bill yields also slipped below zero in the past.

-By Tommy Stubbington, Dow Jones Newswires, +44 20 7842 9268;

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