German two-year government note yields fell to the lowest in almost two weeks after the European Central Bank lent 149.5 billion euros ($196.5 billion) to banks, signaling continued stress in the financial industry. Ten-year bund yields were within four basis points of the lowest in a week after Fitch Ratings said it may cut Greece’s credit ranking to non-investment grade, underpinning demand for the safest assets. Fitch said late yesterday it expects a review of Greece’s “fiscal sustainability” to be done in January, and there’s a “heightened probability” of a downgrade. “The ECB lent slightly more than we were expecting,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “Downgrades may continue into the New Year. We need to see a concerted response from the euro area. Otherwise the negative sentiment is likely to continue.” German two-year yields fell five basis points to 0.99 percent as of 11:50 a.m. in London. The 2.5 percent security due January 2021 rose 0.95, or 95 euro cents per 1,000-euro face amount, to 100.02. Ten-year yields were three basis points lower at 2.96 percent. The Frankfurt-based ECB said 270 banks asked for the three- month funds over 98 days, which will be loaned at its average benchmark interest rate over the period. Banks tomorrow need to repay 96.9 billion euros in maturing 12-month loans and 38.2 billion euros in three-month loans on the following day. Liquidity Needs “Banks’ liquidity needs are still pretty high and they remain dependent on the ECB,” said Ulf Kraus, a fixed-income strategist at Helaba Trust GmbH in Frankfurt. “The crisis is not over yet and today’s figure shows that the ECB took the right decision to continue with the full allotment.” Moody’s Investors Service put Portugal’s A1 long-term and Prime-1 short-term government bond ratings on watch yesterday, saying the rankings may be cut a level or two because of the economy’s “sluggish” growth. The same agency cut Ireland’s credit ranking five levels on Dec. 17. Greek 10-year government bonds declined, with the 10-year yield rising seven basis points to 12.21 percent. Equivalent- maturity Portuguese bonds also fell, pushing the yield up four basis points to 6.78 percent. Spanish 10-year bonds were little changed at 5.55 percent and Italian yields stayed at 4.68 percent. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source