Germany’s Longest Bonds Outperform With ECB Seen Boosting QE

  • Securities due in 20 years or more return 21% in 2016
  • Nation sells 30-year debt at record-low average yield of 0.45%

Investors who bought Germany’s longer-term bonds have collected about nine times the returns of shorter-maturity debt this year, in yet another sign that the European Central Bank’s asset-purchase program is creating demand for higher-yielding holdings.

German securities due in 20 years and longer have returned about 21 percent this year, according to a Bloomberg bond index, compared with the 2.4 percent earned by debt due in one to 10 years, which currently have yields below zero. The lure of debt with a positive yield held on Wednesday, when the nation sold 1 billion euros ($1.1 billion) of 30-year securities at a record-low average yield of 0.45 percent.

“Long-dated bonds have attracted strong demand,” given the ECB’s quantitative easing and general environment of risk aversion, said Elia Lattuga, a fixed-income strategist at UniCredit SpA in London. These securities “will be especially supported over the coming months. Uncertainty on the economic outlook is still high and the ECB continues to absorb paper from the market.”

German 10-year bund yields fell five basis points, or 0.05 percentage point, to minus 0.077 percent as of 4:24 p.m. in London, the biggest decline in one month. The zero percent security due in August 2026 rose 0.498, or 4.98 euros per 1,000-euro face amount, to 100.776.

Yield Frustration

Government bond prices across the euro region are underpinned by speculation the ECB will boost QE at its Sept. 8 meeting, after it kept policy unchanged at its gathering last week. The central bank has intensified its buying of long-dated German bonds as more securities’ yields have been driven below the current ECB deposit rate of minus 0.4 percent, meaning they are ineligible for purchase. A separate rule of the 1.7 trillion-euro QE program is that only debt maturing in two to almost 31 years may be acquired.

Germany’s 30-year bonds also gained on Wednesday, with yields falling seven basis points to 0.40 percent.

The extra yield that investors demand for holding these bonds instead of 10-year securities has fallen in the past two weeks, touching 47 basis points Wednesday, the lowest on a closing basis since July 13.

A gauge of demand known as the bid-to-cover ratio was at 1.47 for Wednesday’s 30-year bund auction, in line with the average of the last five years. In five-year note sale last week, the bid-to-cover ratio fell to 1.03, the lowest since 2011.

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