By Anchalee Worrachate – May 21, 2010
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German 10-year bonds rose, pushing yields to a record low, after a survey showed the nation’s business confidence unexpectedly fell as Europe’s debt crisis fuelled concern the euro may collapse.

Greek two-year notes stayed higher after Germany’s lower house of parliament voted to back the country’s share of a $1 trillion euro-region bailout, allaying market concern it would balk at approving a second emergency loan package in as many weeks. Bonds also rose as European stocks declined, boosting demand for the safest assets. Bunds fell earlier after exports rose more than economists forecast in the first quarter.

“There’s no end to risk aversion,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate and Investment Bank. “There’s still a lot of nervousness in the market and people don’t want to go into the weekend uncovered.”

The yield on the 10-year German bund, Europe’s benchmark government security, dropped 4 basis points to 2.64 percent at 12.55 p.m. in London, leaving it 21 basis points lower from last week. The yield fell to 2.63 percent earlier, the lowest since at least 1989 when Bloomberg started collecting the data. The 3 percent security due July 2020 rose 0.39, or 2.9 euros per 1,000-euro ($1,256) face amount, to 103.14.

The Stoxx Europe 600 Index dropped for a third day, falling 2.5 percent.

Federal Reserve Governor Daniel Tarullo said yesterday the debt crisis in Europe may pose a threat to U.S. and world economies as trade shrinks and banks incur losses on European investments.

‘Deeper Contraction’

“A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Tarullo said in testimony to House Financial Services subcommittees.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, eased to 101.5 from 101.6 in April. Economists expected an increase to 101.9, according to the median of 37 estimates in a Bloomberg News survey. Ifo’s gauge of executives’ expectations fell to 103.7 from 104.

German exports in the first quarter climbed 2.6 percent from the fourth, the Federal Statistics Office in Wiesbaden said today. The median forecast in a survey of economists by Bloomberg was an increase of 1.5 percent.

Greek two-year bonds climbed, sending the yield down 15 basis points to 8.02 percent. Investors demanded an extra 519 basis points of yield to hold the Greek debt instead of bunds, compared with 510 basis points yesterday and 519 basis points on May 17.

Spanish Bonds

Spanish 10-year notes rose as the nation approved the first public wage cuts since returning to democracy in 1978 and reduced its economic growth forecast for next year as the government tries to tame the euro region’s third-largest budget deficit.

Gross domestic product will grow 1.3 percent in 2011, less than a previous projection for 1.8 percent, and the government said the deficit will narrow to 6 percent of GDP next year from 11.2 percent in 2009. Wages for government workers will drop 5 percent in June.

The yield on the 4 percent security due in April 2020 fell 4 basis points to 4.07 percent. The extra yield that investors demand for holding the bond instead of German bunds rose to 138 basis points from 112 basis points at the start of the week.