German bond yield drops below inflation rate

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The yield on safe-bet German government bonds on Tuesday fell below the country's inflation rate for the first time since reunification in 1990, in a worrying development for the eurozone debt crisis.

The yield on benchmark German 10-year government bonds fell to 2.395 percent, below the 2.4 percent July inflation rate, amid unprecedented demand for the instruments considered to be a safe haven for cash.

German government bonds are seen as the safest in the eurozone, and a rate of return below inflation indicates that investors are willing in effect to pay for security instead of risking a return elsewhere.

Italy and Spain came under intense pressure Tuesday on the government bond markets, with the spreads between yields on their bonds and those of Germany driven up to record levels as concern mounted over whether they would be the latest to succumb in the eurozone debt crisis.

The spread on benchmark 10-year Italian bonds widened to 3.74 percentage points above German bonds and to 3.93 percentage points for Spanish bonds.

The yield on Italian bonds rose to 6.165 percent in mid-morning trading from 5.988 percent on Monday, while Spanish bonds climbed to 6.326 percent from 6.180 percent.

Yields of 6.0 percent or more are widely considerd to be unsustainable for slow-growth eurozone countries.

© 2011 AFP

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