Bunds Fall to Record Low of 2.35% as Growth Worries Raise Demand for Bonds

German 10- and 30-year government bond yields fell to record lows as deepening concern that global growth is faltering boosted demand for fixed-income assets.

Two-year yields reached the lowest in more than a month after data showed Japan’s economy grew at less than a fifth of the pace economists estimated last quarter. Irish 10-year bonds fell for a sixth day on concern the bailout of Anglo Irish Bank Corp. will increase the nation’s fiscal deficit. Ireland is due to sell up to 1.5 billion euros ($1.9 billion) of debt tomorrow. Germany plans to sell as much as 6 billion euros the day after.

“There are deteriorating global growth prospects, and for the core fixed-income universe the markets will remain well supported,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “In an environment where investors are nervous, there’s little prospect to expect peripheral spreads to narrow.”

The 10-year bund yield, Europe’s benchmark debt security, fell as much as four basis points to 2.35 percent and was at 2.36 percent as of 11:22 a.m. in London. The 3 percent security due in July 2020 rose 0.29, or 2.90 euros per 1,000-euro ($1,281) face amount, to 105.58. The two-year yield fell three basis points to 0.64 percent after reaching 0.63 percent, the lowest since July 7.

The German 30-year bond yield reached a record low of 3.085 percent.

Recovery Concern

Concern the recovery from the worst recession since World War II will slow has helped drive demand for the safest securities. German bonds have returned 8.1 percent so far this year, according to indexes compiled by European Federation of Financial Analysts Societies. Irish debt is little changed for the year to date and Spanish securities have handed investors a 1.1 percent profit, the indexes show.

Japan’s gross domestic product rose an annualized 0.4 percent in the three months ended June 30, the Cabinet Office said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for growth of 2.3 percent.

Ireland’s 10-year bond yield rose six basis points to 5.49 percent. The nation’s budget deficit will grow this year because of its transparency in recognizing loan losses, European Central Bank Governing Council member Patrick Honohan said at a conference in Hong Kong today. The bailout of Anglo Irish Bank is a “shock to the system” and will result in a “manageable sum,” said Honohan, Ireland’s central bank governor.

Investor “jitters” on the impact of the Anglo Irish Bank bailout on Ireland’s finances are misplaced, according to Davy, the Dublin-based securities firm.

Irish Yield Premium

The premium investors demand to hold Irish 10-year debt over the German benchmark rose last week as the European Commission approved a total capital injection of as much as 24.5 billion euros into Anglo Irish. While that may be counted as part of Ireland’s deficit this year, payment and borrowing will be spread over as long as 15 years.

“The optics here are truly appalling, but this is an exercise in Eurostat accounting treatment that has scant bearing on Ireland’s underlying fiscal position,” Donal O’Mahony at Davy said in a note today.

The yield spread widened a further 10 basis points to 303 basis points today. It reached 316 basis points on May 7, before the European Union crafted a package of measures to tackle the region’s sovereign-debt crisis and the euro area central banks started buying government bonds.

Greece, Portugal

Ireland plans to sell as much as 1.5 billion of securities due in 2014 and 2020 tomorrow. The following day Germany will sell up to 6 billion euros of 10-year bonds.

The bund rally “could mean that the financing costs for the German Finance Agency will reach an all-time low this week,” Viola Stork, an economist at Helaba Landesbank Hessen- Thueringen in Frankfurt, wrote today in a report. For Ireland, “the timing is clearly unfavorable for the Treasury as risk premiums for Irish government bonds have climbed sharply,” Stork said.

Greek 10-year bonds fell, with the yield rising 12 basis points to 10.66 percent. Portuguese 10-year bonds were little changed, with the yield at 5.28 percent.

French 10-year bonds rose, with the yield falling to a record 2.68 percent, while the Dutch 10-year yield reached a record 2.57 percent and the Austrian yield reached 2.77 percent.

Consumer prices in the 16 nations that use the euro increased 1.7 percent in July from a year earlier after rising 1.4 percent in June, the European Union statistics office in Luxembourg said today, confirming a flash estimate on July 30. That’s the fastest inflation since November 2008.