- Plunge in yields accelerated after Yellen, Brexit fears
- Pimco says avoiding negative yield, German ‘very close’ to it
Germany’s 10-year bond yields, already at a record-low, are likely to test zero as soon as this week, according to the top-ranked primary dealer of the nation’s debt.
“The market looks poised to test the level,” said Michael Leister, the Frankfurt-based head of rates strategy at Commerzbank AG. “I think it can happen over this week. Momentum is quite strong, we’re not that far away from the zero line.”
German securities, which act as Europe’s benchmark sovereign debt, gained as investors digested signs of a slowdown in the U.S. labor market, contended with this month’s referendum on the U.K.’s membership of the European Union and absorbed the effects of unprecedented monetary stimulus. The plunge in yields accelerated after Federal Reserve Chair Janet Yellen signaled on June 6 that officials are in no rush to raise U.S. interest rates.
Germany’s 10-year yield fell to as low as 0.033 percent, the least on record. It was little changed at 0.06 percent as of 4:19 p.m. London time. The price of the 0.5 percent bund due in February 2026 was at 104.26 percent of face value.
Bonds from other European nations have also been rising. The yield on 10-year Spanish bonds fell two basis points to 1.44 percent, while that on similar-maturity Italian bonds dropped one basis point to 1.41 percent.
A move below zero would see Germany join Japan and Switzerland in having negative yields for a decade or longer, and add to the existing pile of about $2.9 trillion of such bonds in the euro area. Yields below zero mean investors who buy the debt now and hold them to maturity will receive less than they paid.
“It’s unlikely that this spiral is going to reverse,” Leister said. ‘Even zero levels for the 10-year seem possible at this stage.”
Some investors are shying away from negative yielding securities. Pacific Investment Management Co., which had $1.43 trillion of assets under management as of Dec. 31, is avoiding negative yields and trying “to find secure and safe income in other areas of the market,” according to money manager Geraldine Sundstrom.
“In Germany we’re very close” to negative 10-year yields, Sundstrom said in an interview Bloomberg’s Francine Lacqua on "The Pulse." “The flight to safety is evident,” as the market becomes nervous about the possibility of shocks stemming from events such as Britain’s EU referendum and the U.S. presidential elections.
With surveys suggesting the referendum result is too close to call just 15 days before the vote, investors are concerned about the potential impact of a Brexit on the world economy. European Central Bank President Mario Draghi last week mentioned the vote as one of the downside risks to the euro-region’s economy, at a time of slow growth and low inflation in the region.
The ECB, which started buying corporate bonds on Wednesday as part of its 80-billion-euro monthly quantitative easing, predicts the euro-region economy will slow in the second quarter, even as data Tuesday confirmed it grew at the fastest pace in a year in the first three months of 2016. Officials see inflation in the 19-nation bloc staying low or even turning negative. German securities have returned 4.8 percent this year, compared with 3.8 percent for Treasuries, according to Bloomberg World Bond Indexes.
“The U.K. Brexit vote has helped stir up some concerns about the robustness of the euro zone and the EU again,” Steven Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London, wrote in a note to clients Wednesday. “If the U.K. votes to leave we’re almost certain to see 10-year German yields turn negative.”