UPDATE 3-Euro zone bond yields crater as bank turmoil spooks investors

(Updates prices, adds chart and analyst comment on poor liquidity) By Alun John and Harry Robertson LONDON, March 15 (Reuters) - Euro zone bond yields plunged again on Wednesday, with the German two-year yield set for its largest daily fall since 1995 as another bout of turmoil in European banking stocks sent investors scrambling for the safety of government bonds. Moves were particularly dramatic at the short end of the curve, which is highly sensitive to changes in interest rate expectations. As investors' nerves grew, traders began to bet the European Central Bank (ECB) would carry out a smaller rate hike at its meeting on Thursday. Germany's two-year yield dropped 51 basis points (bps) to 2.419%, putting it on course for its biggest daily fall since 1995. It was a bigger drop even than Monday, when the yield plunged 37 bps. Bond yields fall when prices rise and vice versa, so falling yields are a sign of investors rushing to buy bonds, which are seen as ultra-safe investments. Since Thursday, when problems emerged at Silicon Valley Bank, the first trigger for the sell-off in banking stocks, the German two-year yield has fallen 92 bps, marking its largest five-day drop since 1981. The latest rush into bonds followed Credit Suisse's largest investor saying it could not increase its stake in the Swiss bank for regulatory reasons, sending the company's shares down at one point more than 30% and broader European equities sliding once more.

BIGGEST DROP German 10-year Bund yields , seen as the benchmark for the euro zone, fell 31 bps to 2.141%. That would be the biggest daily drop since the Black Monday stock market crash of 1987. The 10-year yield stood at an 11-year high of 2.77% at the start of March.

"We're back off to the races, the markets are spooked by the Credit Suisse headline that the Saudi National Bank would not increase its stake," said Richard McGuire head of rates strategy at Rabobank.

"That’s caused the Credit Suisse share price to fall, and the German curve has bull-steepened - short-end rates have fallen faster than long end - as the market reassesses yet again the outlook for ECB policy."

Money markets on Wednesday were pricing in an 85% chance the ECB will only raise rates by a quarter point on Thursday, with a 15% chance they stick with the 50 bps they had previously flagged. Italy's 10-year yield fell 21 bps to 4.101%, while the two-year yield dropped 33 bps to 3.13%. The rush to the safety of German Bunds meant the Italian-German 10-year spread widened at one point to almost 199 basis points, the most since late January.

Portfolio managers and traders said they were finding it harder than normal to buy and sell assets - as is typical at times of market stress - driving volatility in prices.

"Liquidity is extremely poor in the market, so you are getting big moves," said Jon Jonsson, a senior fixed income portfolio manager at Neuberger Berman.

With yields on short-dated debt dropping, the gap between two-year and 10-year German yields narrowed to around -28 bps on Wednesday, having traded at -70 bps a week ago. The other event for markets on Wednesday was the British government's budget, but the 10-year gilt yield was caught up in broader moves, falling 15 bps to 3.337%.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ German 2-year yield ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Alun John and Harry Robertson, additional reporting by Dhara Ranasinghe, editing by Andrew Heavens, Christina Fincher, Deepa Babington and Ed Osmond)

harry.robertson@thomsonreuters.com))

Reuters

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UPDATE 3-Euro zone bond yields crater as bank turmoil spooks investors

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