German Bond Yields Drop Most Since Brexit as Spain’s Hit Record

Should Bond Investors Be Running for Cover?
  • Spanish five- and 10-year yields drop to all-time lows
  • Bonds surge as Fed refrains from raising interest rates

It was the euro-region bond market’s best day since Brexit.

Benchmark German 10-year bund yields dropped the most since June 24, while those on Spanish five- and 10-year securities slid to all-time lows after the Federal Reserve held off on raising interest rates on Wednesday and scaled back its projections for increases it expects next year.

That added to optimism that central banks aren’t about to wean markets off stimulus anytime soon and helped reinforce wagers that policies will remain accommodative as they seek to boost growth and push up inflation.

The biggest gains were in longer-dated securities, which are more sensitive to the outlook for inflation and had underperformed last week in the run up to the Bank of Japan and Fed meetings. With prolonged easy policies set to keep short-dated note yields anchored near or below zero, they are surging again on demand for higher-yielding securities.

“The Fed was certainly very important and they have kept the liquidity tap on,” said David Schnautz, a director of fixed-income strategy at Commerzbank AG in London. “It helps European government bonds across the board. The hunt for yield is on.”

Germany’s 10-year bund yield fell nine basis points, or 0.09 percentage point, to minus 0.087 percent as of 4:12 p.m. London time. The zero percent security due in August 2026 rose 0.888, or 8.88 euros per 1,000-euro ($1,124) face amount, to 100.859. The drop in yield was the most since the confirmation of the U.K’s decision to leave the European Union fueled concern of renewed financial instability across the globe.

Spread Narrows

Germany’s 30-year bond yields dropped 10 basis points to 0.49 percent, while those on two-year notes fell one basis point to minus 0.665 percent. That left the yield difference, or spread, between the securities at 115 basis points, the tightest in two weeks.

Fed officials led by Chair Janet Yellen indicated a rate increase later this year is likely, although they lowered projections for 2017 and beyond. In Japan, longer-maturity bonds fared best Wednesday after the BOJ shifted the focus of its monetary stimulus to controlling the yield curve.

Spain’s 10-year bond yields fell to as low as 0.897 percent, while those on the nation’s five-year notes touched 0.045 percent. The yield on Italian 10-year securities fell nine basis points to 1.18 percent.

“The event risk is out of the way, and nothing untoward happened,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “A lot of people were defensive ahead of the BOJ and the Fed, understandably given the chatter. The penalty for holding cash is enormous, and that’s what drives this, particularly with quarter-end coming up.”

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