It’s ECB Versus Investors as Bond Scarcity Pushes Yields Lower

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

German four-year yields fell this week to less than the ECB’s minus 0.2 percent deposit rate, meaning they no longer qualify for purchase by the central bank. Around 20 percent of otherwise eligible German securities now yield less than that threshold, Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt, wrote in a report. 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 on Thursday. “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 percent as of 4:24 p.m. London time. That’s down four basis points, or 0.04 percentage point, this week. The yield touched 0.139 percent on Thursday, the lowest level since Bloomberg began compiling the data in 1989. The price of the 0.5 percent bund due in February 2025 was at 103.37 percent of face value.

Negative Yields

The nation’s one-year yield touched minus 0.238 percent and the three-year yield reached minus 0.256 percent on Friday, both record lows, while the eight-year yield was at 0.01 percent after slipping to minus 0.005 percent on Thursday. A negative yield means investors buying the securities now will get back less than they paid when the debt matures.

More than one quarter of the securities in the Bloomberg Eurozone Sovereign Bond Index have yields below zero, data compiled by Bloomberg show. France’s five-year yield fell to as low as minus 0.006 percent on Friday.

As part of its quantitative-easing plan, the ECB has pledged to buy 60 billion euros of assets, including government bonds, on a monthly basis through September next year. The central bank reported buying 41.68 billion euros of sovereign debt in March. Policy makers are next set to meet on April 15 in Frankfurt.

If declines in yields force more bonds outside the scope of the debt-buying program, the ECB may consider either lowering its deposit rate or cutting its monthly purchase limit, Felix Herrmann, a fixed-income analyst at DZ Bank AG in Frankfurt, wrote in an e-mailed report.

“Which of the two options the ECB opts for will presumably also depend on future economic performance in the euro zone,” he wrote.

Buying Demand

Demand for government debt isn’t only being driven by the ECB. Competition for purchases may come from banks requiring bonds to meet regulatory rules, pension funds that need to match their liabilities, passive investors who track debt indexes and other central banks, which buy European securities as part of their balance-sheet management.

That competition pushed the average yield to maturity on the euro region’s government debt to 0.4252 percent on March 11, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

“The ECB isn’t going to stop bond-buying well up until September next year,” Kerry Craig, a London-based global market strategist at JPMorgan Asset Management, which oversees $1.7 trillion, said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro. “Yields are going to be at this low level for a while, so it’s just going to push investors either further along the yield curve or into riskier assets.”

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