• German five-year yields are too low to qualify for ECB QE
  • Nation's bonds fall for second day as stocks extend rally

Germany is set to sell 4 billion euros ($4.3 billion) of five-year government debt at the lowest yield on record at an auction amid speculation that the European Central Bank will increase monetary stimulus next week.

The nation’s five-year notes currently yield less than the ECB’s deposit rate, making them ineligible for the Bundesbank to buy as part of the region’s central bank’s quantitative-easing program. However, bets that the ECB will increase the pace of its asset purchases and lower the deposit rate has increased demand for debt across the region. The central bank is scheduled to announce its policy decision on March 10.

German sovereign securities fell for a second day along with high-rated peers including Austria and France as European stocks extended gains into a fifth day. With traders seeking riskier assets, the yield premium Italian 10-year bonds offer over benchmark German bunds narrowed to the smallest in more than three weeks.

“Should oil and equities recover slightly further, core European government bond yields may rise and spreads with peripherals have room to tighten further,” BNP Paribas SA analysts, led by Laurence Mutkin, London-based head of Group-of-10 rates strategy, wrote in a note. “Some supports remain, however. In particular, expectations of easing by the ECB next week are unlikely to fall.”

Yields Rise

German five-year note yields rose three basis points, or 0.03 percentage point, to minus 0.36 percent as of 9:25 a.m. London time. The zero percent security due in April 2021 dropped 0.155, or 1.55 euros per 1,000-euro face amount, to 101.855. The yield fell to a record-low minus 0.409 percent Tuesday. Benchmark 10-year bund yields climbed five basis points to 0.19 percent.

At a previous five-year note auction on Feb. 3, the securities were priced to yield minus 0.24 percent, the lowest since Bloomberg began compiling the data in 1996.

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