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Germany’s Yield Turns Negative as Notes Rally on Draghi Outlook

ECB President Mario Draghi
Mario Draghi, president of the European Central Bank, left, speaks with Janet Yellen, chair of the U.S. Federal Reserve during the Jackson Hole economic symposium. Photographer: Bradly Boner/Bloomberg

Aug. 25 (Bloomberg) -- A surge in European government bonds sent German two-year note yields below zero after European Central Bank President Mario Draghi signaled that officials are moving closer to quantitative easing.

Belgium’s two-year yield went negative for the first time, while the German rate slid to the lowest since 2012. Draghi said bets on price increases in the euro area “exhibited significant declines.” That boosted bonds across Europe, along with a report that business confidence in Germany, Europe’s largest economy, declined a fourth month. French yields also reached new lows even as the government resigned amid divisions over economic policy.

“On the whole we are moving a bit closer toward QE,” said Elwin de Groot, a markets economist at Rabobank in Utrecht, the Netherlands. “That fits with the market raising the odds of more ECB accommodative measures. Clearly that’s what we are seeing in the markets.”

Germany’s two-year note yield slid three basis points, or 0.03 percentage point, to minus 0.034 percent at 4:30 p.m. London time, having earlier touched minus 0.046 percent, the least since December 2012. The 0 percent securities maturing in September 2016 advanced 0.073, or 73 euro cents per 1,000-euro ($1,320) face amount, to 100.067. The one-day drop in yield today was the most since Jan. 16.

Belgium’s two-year rate fell 2 basis points to 0.017 percent, after being as low as minus 0.002 percent. The nation’s 10-year rate slipped five basis points to 1.30 percent.

Extended Rally

Euro-area bonds have extended a rally that started in 2012 amid skepticism that the ECB can reignite the economy without the money-creating policy that’s been pursued by counterparts in the U.S., the U.K. and Japan. A negative yield means investors holding the securities until they mature receive less back than they paid to buy them.

German five-year yields declined three basis points to 0.187 percent after reaching as low as 0.164 percent.

Draghi said that investor expectations for inflation have dropped.

“The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term,” he said at the Federal Reserve Bank of Kansas City’s annual economic symposium at Jackson Hole, Wyoming.

Fed Chair Janet Yellen told the conference that the U.S. labor market has made “considerable progress” and that officials are debating when they can begin “dialing back our extraordinary accommodation.”

Economic Reports

Euro-area inflation slowed to 0.3 percent this month, a fraction of the ECB’s goal of just under 2 percent, according the median forecast in a Bloomberg News survey ahead of an Aug. 29 report. Other releases this week are predicted to show unemployment sticking close to a record, economic confidence falling and gross domestic product in the 18-nation currency bloc stagnating in the second quarter. The Frankfurt-based ECB next sets monetary policy on Sept. 4.

Italian 10-year yields fell 11 basis points to 2.47 percent after being at 2.44 percent, the lowest since Bloomberg started collecting the data in 1993. Rates on similar-maturity Spanish securities decreased 13 basis points to 2.26 percent, having touched a record-low 2.214 percent.

Spanish Value

“Peripherals should also remain in demand as QE speculation adds momentum to the renewed spread tightening with 10-year core yields trading around 1 percent and investors in need of pick up,” Commerzbank AG analysts Christoph Rieger and Michael Leister wrote in a client note today. “Spain in particular offers value.”

French President Francois Hollande asked Prime Minister Manuel Valls to form a new cabinet after he presented his resignation to the president. His economy minister, Arnaud Montebourg, had used a weekend interview with Le Monde newspaper to call for fiscal stimulus to bolster growth.

Montebourg said the government shouldn’t be “slavish” or “dogmatic” in its pursuit of deficit reductions because such a policy leads to higher unemployment.

The French 10-year yield decreased seven basis points to 1.301 percent after touching 1.30 percent, the lowest since Bloomberg started collecting the data in 1990.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Mark McCord, Todd White

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