- Germany auctions 10-year benchmark at lowest yield since April
- Treasury-bund spread near three-month high before Fed decision
Euro-area government bonds rallied, sending short-term yields from Belgium and Finland to France and Germany to record lows, in a signal that the market believes Mario Draghi when he hinted last week the European Central Bank will ease monetary policy further.
Germany’s 10-year bund, Europe’s benchmark sovereign bond, was little changed after the nation sold the securities at the lowest auction yield since April. Bonds were supported by remarks Tuesday from ECB President Draghi’s colleague, Executive Board member Benoit Coeure, who reiterated the institution may need to do more to help boost prices, as inflation has failed to rebound.
Longer-dated German bonds reversed gains as oil prices climbed. Still, the extra yield premium that investors demand for holding U.S. 10-year Treasuries instead of the European benchmark stayed close to a three-month high on speculation that central-bank policy divergence will continue even if the Federal Reserve, which concludes a meeting on Wednesday, leaves U.S. rates on hold for the rest of the year.
“The ECB’s policy remains the key driver for bonds, and we expect the central bank to expand the monthly volume and duration of its quantitative-easing program as well as cutting the deposit rate,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Inflation is still well below target. German import-price data may not have helped.”
A report on Wednesday showed the import price index in Europe’s biggest economy dropped 4 percent in September from a year earlier.
Germany’s 10-year bond yield was at 0.44 percent as of 4:28 p.m. in London, having fallen to 0.42 percent earlier, the least since May. The price of the 1 percent security due in August 2025 was 105.35 percent of face value. The yield on the nation’s two-year notes touched a record-low minus 0.355 percent.
Two-year note yields in Finland dropped to as low as minus 0.329 percent. French two-year yields fell to as low as minus 0.294 percent, while those of Belgium slipped to minus 0.298 percent, also records. This took the amount of European government securities with negative yields to the equivalent of $1.9 trillion, based on securities in the Bloomberg Eurozone Sovereign Index.
Germany allotted 2.455 billion euros of 10-year bunds at an average yield of 0.44 percent on Wednesday, down from 0.62 percent for the same bonds on Oct. 7. That’s the lowest since the April auction, when it was a record 0.13 percent.
“This is simply the further feed-through of another round of likely rate-cutting in store from the ECB and spillover implications for other central banks in the region,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “I’d say we aren’t done yet on lower rates. Fair value for schatz is probably now more in a minus 0.4 to minus 0.5 percent range,” he said, referring to the nation’s two-year notes.
Ten-year bund yields have dropped about 12 basis points since before the ECB’s policy meeting on Oct. 22, when Draghi said QE will continue until the central bank sees a sustained increase in the inflation outlook.
The gap in yields between German bonds and 10-year Treasuries grew to 1.61 percentage points on Wednesday, the widest since July.
“People take Draghi’s words seriously, and German bonds would stand to benefit a lot if the program is expanded,” Felix Herrmann, a fixed-income analyst at DZ Bank AG in Frankfurt, said before the German auction. “The policy backdrop is positive, and it’s crucial.”