German Yields Fall to Records as Moody’s Warns on Bond Scarcity

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With the European Central Bank poised to deliver an update on its bond-buying program on Wednesday, the assessment of investors is becoming clear -- prepare for ever-lower yields.

Germany’s 10-year yields dropped to a record on Tuesday, along with those in five other euro-area nations, as the ECB’s 1.1 trillion euro ($1.2 trillion) quantitative-easing program boosted prices of sovereign securities across the region. The ECB could run out of eligible bonds to buy from some governments around the end of this year, which may prompt the central bank to loosen the rules of the plan and further suppress yields, according to Moody’s Investors Service.

“The idea of bunds going to zero, or even into negative territory, is now a consensus view rather than an outlying suggestion,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “Now we’re in a new quarter I think people are reloading positions.”

Benchmark German 10-year yields fell two basis points, or 0.02 percentage point, to 0.14 percent as of 4:08 p.m. London time and touched 0.13 percent, the least since Bloomberg began compiling the data in 1989. The 0.5 percent bund due in February 2025 rose 0.19, or 1.90 euros per 1,000-euro face amount, to 103.54. The five-year yield declined to minus 0.146 percent and the 30-year yield dropped to 0.578 percent, both the lowest on record.

Supply Shortage

“Even if the pace of decline in bond yields slows in the remainder of the year, the ECB could run out of eligible bonds from some governments by the turn of the year,” Moody’s Senior Vice President Marie Diron wrote in a note published Tuesday.

“The QE program could exhaust the supply of eligible bonds from the governments of Germany, the Netherlands, Finland, France, Austria, Belgium, Ireland and Portugal,” and “only Spanish and Italian bonds would be available until the end of the program,” Diron wrote.

Twenty-eight percent of German bonds within the two- to thirty-year range have yields below the ECB’s minus 0.2 percent deposit rate, according to Moody’s, making them ineligible for the QE program. This share was 5 percent when the ECB announced buying in January.

Meanwhile, supply is also shrinking. The German debt agency plans to sell 147 billion euros of conventional bonds this year, compared with redemptions of 155 billion euros, according to its outlook published in December. As much as 14 billion euros of inflation-linked bonds, which are also eligible for ECB purchase, will also be auctioned.

Germany is scheduled to sell 4 billion euros of 10-year bunds on Wednesday.

Greek Bonds

Greece’s bonds, which are currently excluded from the ECB program, fell on Tuesday as government officials returned to work after the Orthodox Easter break to resume negotiations to unlock financing and keep the country afloat. The yield on Greek notes due in July 2017 rose 225 basis points to 23.59 percent, the biggest increase since Feb. 9.

The Netherlands auctioned five-year government debt with a negative yield for the first time on Tuesday. The Dutch State Treasury allotted 2.5 billion euros of securities due in January 2020 at an average yield of minus 0.094 percent, down from 0.01 percent at a previous sale on Feb. 10.

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