The rally in European government bonds this year has been so potent that Germany’s yield is now approaching zero even for its 10-year debt. For Steven Major, global head of fixed-income research at HSBC Holdings Plc, that’s not necessarily a reason to be cheerful.
“I feel very uncomfortable with this idea that the yield can only go down,” Major, one of the few forecasters who correctly predicted 2014’s gains in U.S. bonds, said in an interview. “For this month, it’s quite possible that the 10-year yield does challenge zero. But really, going a few months out, there are so many things that could go wrong.”
Euro-area securities have surged this year, pushing yields to record lows across the region, as the European Central Bank started its 1.1 trillion euro ($1.2 trillion) bond-buying program. Germany’s eight-year yields dropped below zero last week, while those on benchmark 10-year bunds touched a record 0.139 percent.
The yield on the nation’s 10-year securities was little changed at 0.16 percent as of 4:08 p.m. London time on Monday. The price of the 0.5 percent bond due in February 2025 was 103.345 percent of face value.
HSBC is the third-ranked primary dealer by German bund sales volume. Major, who spoke Monday on Bloomberg Television’s “On The Move” with Jonathan Ferro in London, stood out last year for correctly predicting that 10-year Treasury yields would drop to about 2.1 percent, while many others said yields would approach 4 percent. Some investors thought we were “completely bonkers,” Major said in a previous Bloomberg interview.
Reasons for Pessimism
Major highlighted supply from sovereigns and U.S. corporates, technical constraints of the ECB’s buying plan and challenges in the repurchase market, as well as improving economic data, as issues that could derail the current rally.
Italy sold 7.5 billion euros of bonds on Monday, with borrowing costs rising for the first time this year for the securities due in 2018 and 2022, and sliding on those maturing in 2030. The Netherlands is selling debt tomorrow, while Germany, Spain and France are also holding auctions this week.
The yield on Italian 10-year bonds added two basis points to 1.29 percent on Monday, and Spain’s also rose two basis points, to 1.26 percent.
The ECB announced details of the first month of bond purchases last week, with debt purchased by national central banks in Europe’s core countries, including Germany, France and the Netherlands, having shorter average maturities than those in Spain and Italy.
Even in the early stages of the program, there is evidence that not all investors are willing to sell their holdings, according to Major.
“There’s a lack of willing sellers of bonds into the bid from the ECB,” he said.