Euro zone yields tumble thanks to safe-haven rush

German 10-year Bund yields, the regional benchmark, fell 29 bps to 2.16%, set for their biggest daily fall since 2011. "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.

Euro zone bond yields plunged again on Wednesday, with the German two-year yield set for its largest daily fall in 27 years, 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. Germany's two-year yield dropped 45 basis points (bps) to 2.475%, a larger drop than Monday's, putting it on course for its biggest daily fall since 1995.

Bond yields fall when prices rise and vice versa, and so falling yields are a sign of investors rushing to buy bonds. 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 85 basis points, marking its largest five-day drop since 1981.

The latest rush to the safety of 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 23% and broader European shares sliding once more. German 10-year Bund yields, the regional benchmark, fell 29 bps to 2.16%, set for their biggest daily fall since 2011.

"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."

"However, we think neither the Fed or ECB will be blown off track, inflation targeting is first and foremost," he said. Money markets on Wednesday were pricing in a 70% chance the European Central Bank will only raise rates by a quarter point this week, with a 30% chance they stick with the 50 bps they had previously flagged.

With yields on short-dated debt dropping, the gap between two-year and 10-year German yields narrowed to -32.5 bps on Wednesday, having traded at -70 bps a week ago. Italy's 10 year yield fell 22 bps to 4.09, while the two-year yield dropped 26 bps to 3.20%.

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. 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 20 bps to 3.3%.