German bonds rose, pushing 10-year yields below 1 percent, boosting speculation that the European Central Bank will have to act to avert the kind of slump that stymied economic growth in Japan for more than a decade.
Euro-area bonds from Ireland to Greece advanced as data showed Europe’s largest economy shrank more in the second quarter than analysts predicted and France’s stagnated. While record-low yields cut borrowing costs for governments in capital markets, they also signal skepticism that the ECB can reignite the economy without the money-printing policy that’s been pursued by counterparts in the U.S., U.K. and Japan.
“If you are bullish on rates here, then you have to expect something like quantitative easing,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “Inflation is very low and growth is disappointing, so it feels a bit like a Japanese scenario.”
Germany’s 10-year yields fell one basis point, or 0.01 percentage point, to 1.02 percent at 4:14 p.m. London time after touching 0.998 percent, the least since Bloomberg began tracking the data in 1989. The 1.5 percent bund due in May 2024 rose 0.11, or 1.10 euros per 1,000-euro ($1,338) face amount, to 104.475.
Japan and Switzerland are the only two other developed nations able to borrow at less than 1 percent for a decade, according to data compiled by Bloomberg.
Japanese 10-year government bonds yielded 0.51 percent today, while the equivalent rate on Swiss (GSWISS10) securities was 0.48 percent. Japan’s central bank has been buying about 7 trillion yen ($68 billion) of sovereign bonds a month in a program that started in April 2013. The Japanese economy is smaller than at its 1995 peak, data compiled by Bloomberg show.
Germany’s gross domestic product fell 0.2 percent from the first quarter, when it rose a revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today.
The median forecast in a Bloomberg News survey of analysts was for a 0.1 percent contraction in Germany, for which the outlook is clouded by the impact of international measures against Russia over its support of separatists in Ukraine.
Euro-area GDP was unchanged from the first quarter, when it increased 0.2 percent, the European Union’s statistics office in Luxembourg said today. The median forecast in a Bloomberg survey of analysts was for growth of 0.1 percent.
Germany’s five-year rates dropped to an all-time low 0.203 percent while the two-year note yield reached minus 0.01 percent, the lowest level since May 2013. A negative yield means investors who hold a security until it matures will receive less than they paid to buy it.
Gross federal borrowing in Germany will drop to 189.4 billion euros in 2015 from 206.1 billion euros this year, cutting net new borrowing to zero from 6.5 billion euros in 2014, according to a Finance Ministry report submitted to parliament in Berlin.
“A combination of weak growth, deflation risk and narrower supply will maintain a supportive ground” for bunds, said Alessandro Giansanti, a fixed-income strategist at ING Groep NV in Amsterdam. “The prospect of quantitative easing from the ECB is mounting and it’s having positive effects on the government bond market.”
Ireland’s 10-year bond yield declined as much as seven basis points to 2.087 percent, the lowest since Bloomberg started tracking the data in 1991. Rates on similar-maturity Belgian bonds slipped to 1.389 percent, also a record.
France’s 10-year bond yield dropped two basis points to 1.40 percent, after slipping to as low as 1.39 percent. Spanish two-year rates fell to a record 0.195 percent, while those on equivalent Italian securities reached 0.339 percent, also the least on record.
Prospects of the euro-area economy slipping back into recession and consumer prices rising at less than half the ECB’s target is driving demand for bonds and pushing yields down across the region. A report yesterday showed Spain’s annual consumer prices dropped in July at the fastest pace since 2009, supporting the case for the ECB to add to stimulus after it cut interest rates to record lows in June.
A separate report today confirmed consumer prices in the currency bloc rose 0.4 percent in the 12 months through July.
Bond-based measures signal investors expect a prolonged period with inflation below the ECB’s goal of just below 2 percent. Germany’s 10-year break-even rate, a gauge of the consumer-price outlook derived from the yield difference between regular and index-linked bonds, fell three basis points to 1.17 percentage point, the lowest since at least 2009 based on closing prices, according to data compiled by Bloomberg.
Portuguese bonds offer value because the yield spread to German bunds widened in recent months, Yannick Naud, chief investment officer at Sturgeon Capital Ltd., said in an interview with Manus Cranny and Mark Barton on Bloomberg Television’s “Countdown” program.
Portugal’s 10-year rate tumbled 13 basis points to 3.55 percent, leaving the gap with German peers with a similar due date at 254 basis points. The spread has widened from as low as 184 basis points on June 10, the narrowest since May 2010.
Volatility on Portuguese government bonds was the highest in euro-area markets, followed by those of Spain and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
Greek 10-year bonds rose for a sixth day, with the 10-year yield dropping 24 basis points to 6.03 percent, after being as low as 5.93 percent, the least since July 31.
German securities returned 6.4 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 11 percent, Italy’s 10 percent and France’s 7.9 percent.