German, U.K. Bond Yields End Week at Record Lows as Havens Rally

  • Shorter-term yields also at all-time lows after U.S. jobs data
  • Benchmark debt beats Italian peers first time in four weeks

European government bonds rose, with 10-year yields closing at the lowest on record in Germany and the U.K., after a worse-than-predicted U.S. jobs report drove investors to the safest government securities.

The benchmark euro-zone debt followed Treasuries higher after the data virtually wiped out the prospect of an imminent interest-rate increase by the Federal Reserve, as indicated in futures prices. German five-, eight- and nine-year yields tumbled to the lowest ever. Ten-year gilts rounded out a second-straight weekly advance amid speculation a Brexit is becoming more likely

The yield on Germany’s 10-year bund fell five basis points, or 0.05 percentage point, to 0.068 percent as of the 5 p.m. close in London. That’s the lowest closing-market rate on record. The 0.5 percent security due in February 2026 rose 0.45, or 4.50 euros per 1,000-euro ($1,134) face amount, to 104.17.

Ten-year gilt yields ended the week at 1.276 percent, also a record-low closing rate.

“Since the Fed has a track record of preferring to err on the cautious side, I assume a June hike is definitely off the table and July unlikely even if Bremain wins in the U.K.,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “Chances are” bund yields “will consolidate below 0.1 percent,” he said.

‘Enter Shorts’

Germany’s five-year debt yield fell to minus 0.416 percent, with the eight-year yield sliding to minus 0.202 percent and nine-year yields at minus 0.079 percent -- all record lows.

The 10-year bund yield slid earlier to 0.065 percent, the lowest intraday level since April 2015.

German securities also beat their lower-rated peers this week amid the demand for havens. The extra yield offered by Italy’s 10-year bonds widened for the first time in four weeks as opinion polls suggested the campaign to pull Britain out of the European Union is gaining ground.

“The closer a Brexit, and the longer the uncertainty prevails, the more cautious are investors,” said Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. “In this scenario, safe havens like bunds are preferred choices because the periphery could be strongly affected by the political impact of a Brexit.”

Italy’s yield spread over the German securities increased four basis points from last Friday to 1.26 percentage points. Spain’s 10-year spread widened five basis points to 1.40 percentage points, the first increase in three weeks.

Bunds were also supported after the European Central Bank unveiled largely unchanged inflation forecasts on Thursday, with President Mario Draghi insisting that his stimulus program is only half done.

Market indicators back that outlook. The 10-year consumer-price swap, a gauge of inflation expectations, slipped to 1.14 percent, from 1.18 percent a week ago and compared with a 2016 high of 1.30 percent at the start of January. Inflation hurts the fixed payments that bonds provide to investors.

“Bund yields are now back at the very lows, oil is rising, inflation expectations look to have bottomed and growth is picking up in the euro area, which argues for higher bund yields,” said Renuka Fernandez, a senior rates strategist at Toronto Dominion Bank in London. “We’re approaching levels where it looks good to enter into short positions,” she said, referring to bets the price of the securities will fall.

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