PARIS (MNI) – The great divide in European interest rates widened
on Wednesday as short-term note yields showed minus signs in a growing
number of northern European government bond markets while rates in
southern Europe continued to rise.

Germany sold E4.2 billion of two-year notes at an average rate of
-0.06%, the first negative yield at a German two-year sale. Rates on
two-year notes in Finland and Austria dropped briefly below zero
before rising slightly, while yields in Denmark and Switzerland
remained solidly in negative territory.

“If you a looking for a risk-free rate in short-dated European
bonds, you are looking at a minus sign,” said Justin Knight, interest
rate strategist at UBS.

Analysts said the ongoing flight-to-quality out of the European
periphery into core markets has been given added impetus by the European
Central Bank’s recent cut in its deposit rate to zero.

The ECB move has fueled the scramble for yields, prompting
investors to move further out on the yield curve or into semi-core
markets like France and Belgium.

“There is very much a yield grab going and it’s prompting a very
sharp convergence” in the northern tier, said Luca Jellinek, head of
European interest-rate strategy at Credit Agricole CIB.

Two-year yields late Wednesday were negative in Germany (-0.047%),
Denmark (-0.31%) and Switzerland (-0.38%) and barely positive in the
Netherlands (0.010%), Finland (0.018%) and France (0.12%).

Spain’s two-year note yield, meanwhile, climbed 25 basis points
Wednesday to 4.97%, while two-year rates edged up to 3.60% in Italy and
to 9.85% in Portugal.

Joerg Asmussen, a member of the ECB’s Executive Board, said in an
interview released Wednesday that the current divide between north and
south in Europe is at a level “that I have not experienced over the last
10 to 15 years.” He added: “We must quickly move away from that.”

Analysts said some big investors, particularly hedge funds, may be
willing to accept negative yields because they are also betting that the
single currency ultimately won’t survive.

“You could say that getting a negative yield on a [German] Schatz
is an option on the euro breaking up,” said Jellinek of Credit Agricole.
“Instead of getting 100 euros back you get 100 new Deutsche marks.”

–Paris newsroom; +33142715540; jduffy@marketnews.com

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