In-demand German bond yields fall to record lows

Germany’s government bonds extended an advance this week, that pushed yields to record lows as investors rushed to compete with demand from the European Central Bank’s debt-purchase programme.

German four-year yields this week fell to less than the ECB’s minus 0.2 % deposit rate, which means the securities no longer qualify for purchase by the central bank. Around 20% of otherwise eligible German securities now yield below that threshold, Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt, wrote in a report on April 9. That’s making longer-dated German debt even more scarce, helping to send the eight-year yield below zero on Thursday.

“There’s considerable excess demand to come from the ECB and you see yields drifting lower almost day-by-day now,” Axel Botte, a fixed-income strategist at Natixis in Paris, said in an interview. “Having 10-year bund yields negative by the end of the year — that’s certainly a scenario we wouldn’t bet against.”

Germany’s 10-year yield was little changed at 0.16 yesterday, set for a three basis point, or 0.03 percentage point, weekly drop.

The nation’s eight-year yield was at 0.02%, after slipping to minus 0.005% on Thursday. A negative yield means investors buying the securities now will get less back when the debt matures than they paid. More than one quarter of the securities in the Bloomberg Eurozone Sovereign Bond Index have negative yields.

Demand for government debt is not only being driven by the ECB. Competition for purchases may come from banks requiring bonds to meet regulatory rules and pension funds that need to match their liabilities.

Bloomberg