German Bonds' Pause Masks Bullish Trend as Economies Disappoint

  • Nation's business sentiment falls to lowest since end-2014
  • Returns in 2016 beat euro-area average by 1.5 percentage point

A pause in German bonds Tuesday masked a general strengthening trend as the securities remain supported by signals that the global economy is still in the doldrums, with investors increasingly doubting that central banks can stimulate it.

German 10-year bonds, Europe’s benchmark government securities, were little changed after three days of gains. That still left the yield matching the lowest closing level since April. The nation’s sovereign debt has returned 1.5 percentage point more than the average for the bloc this year, according to Bloomberg World Bond Indexes. That reflects an appetite for haven assets even as higher yields are available elsewhere.

Bunds resisted a selloff as an Ifo institute report showed confidence in Germany’s economy slipped to the lowest since December 2014. At the same time, stock markets fell across Europe after the People’s Bank of China reduced the yuan’s reference rate by the most in six weeks.

Selloff Doubted

“Nothing fundamental has changed -- we got a weak Ifo in Germany, equity markets are flat to lower,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “We don’t think it goes a lot more. It’ll be hard to see them sell off too much.”

Germany’s 10-year bund yield was at 0.18 percent as of 4:49 p.m. in London. The 0.5 percent security due in February 2026 fell 0.085, or 85 cents per 1,000-euro ($1,102) face amount, to 103.12. Monday’s closing yield was also 0.18 percent. It reached a record-low 0.049 percent that month.

Italy’s 10-year bonds declined, with the yield rising one basis point to 1.53 percent. The yield on similar-maturity Portuguese bonds rose one basis point to 3.46 percent. Spanish 10-year bond yields dropped two basis points to 1.64 percent.

“Investor confidence in the room for and the effectiveness of policy action –- both fiscal and monetary –- is also ebbing,” analysts led by Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London, wrote in a client note on Tuesday. “The ECB will deliver more easing at the March meeting, but to what effect on the economy?” they said, referring to the European Central Bank’s stimulus program.

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