German Bunds Drop as Investors Feel an Air of Safety in Equities

“German government debt fell, with two-year yields rising to the highest since June, on speculation financial institutions will begin paying back loans from the European Central Bank, pushing up overnight borrowing rates.

Implied yields on Euribor futures contracts jumped and securities from Austria, France and the Netherlands also slid. French 10-year rates rose to the highest in more than two months as yields increased at an auction. Repayments of loans taken from the ECB’s Longer-Term Refinancing Operation will be possible from the end of this month.

“There is some selling pressure in the short-dated core notes and that’s driven primarily by speculation that banks will pay back LTRO and drive overnight rates higher,” said Soeren Moerch, the head of government-bond trading at Danske Bank A/S (DANSKE) in Copenhagen. “The market is badly positioned for this and that caused a bit of a selloff….”

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