German Yields Falling Toward 1% Shows Japan-Style Risks BuildingLukanyo Mnyanda and Neal Armstrong
Germany is on the brink of joining an exclusive club of nations able to borrow for a decade at less than 1 percent. For strategists predicting such a scenario, that’s because the European Central Bank isn’t doing enough to prevent a Japanese-style deflationary spiral from taking hold.
Investors are snapping up Europe’s benchmark securities as they judge the ECB’s stimulus measures insufficient to boost an inflation rate that’s less than half its target. Even after the central bank cut its refinancing rate to a record, introduced a negative deposit rate and announced targeted lending in June, market gauges of inflation expectations are falling. A report today showed German investor confidence declined this month to the lowest level since December 2012.
“There’s general disbelief that the ECB’s policies can reflate the euro-zone economy and achieve sustainable growth momentum,” Lena Komileva, chief economist at G Plus Economics Ltd. in London, said in an interview with Mark Barton, Caroline Hyde and Manus Cranny on Bloomberg Television’s “Countdown” program. “The road to a sub-1 percent 10-year bund yield is wide open.”
Benchmark 10-year yields were little changed at 1.06 percent as of 4:12 p.m. London time after dropping to a record 1.023 percent on Aug. 8. The price of the 1.5 percent bund due in May 2024 was 104.055 percent of face value. Two-year notes yielded minus 0.006 percent after the rate fell to minus 0.008 percent, the least since May 23, 2013.
A negative yield means investors who hold a security until it matures will receive less than they paid to buy it.
Reluctance on the part of ECB officials, led by President Mario Draghi, to adopt full-scale quantitative-easing policies that have been pursued by counterparts in the Federal Reserve, Bank of England and Bank of Japan is prompting comparisons with Japan’s stagnation over the past 15 years. The deflation threat still haunts Japan and the nation’s central bank has been buying about 7 trillion yen ($69 billion) of sovereign bonds a month in a program that started in April 2013.
“In the absence of almost any, let alone vigorous, growth and the ECB voluntarily sticking to (no) plan of zero rates for several years rather than overdue large scale asset purchases, then yield curve Japanification is set to continue,” Royal Bank of Scotland Group Plc analysts including Andrew Roberts, head of European rates strategy in London, wrote in an e-mailed note today. “Bunds are not expensive at 1 percent if growth momentum is slowing,” the analysts wrote.
A yield curve is a chart showing rates on bonds of different maturities.
Japan’s 10-year government bond yielded 0.51 percent today. The rate reached an all-time low 0.315 percent in April 2013 and hasn’t been above 2 percent since May 2006. The average over the past 15 years is 1.29 percent. That compares with an average rate of 3.55 percent for the German bund over the same period.
Switzerland is the only other country whose 10-year yields are below 1 percent, according to data of 25 developed nations tracked by Bloomberg.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, dropped to 8.6 in August from 27.1 in July. Economists forecast a decrease to 17, according to the median estimate in a Bloomberg News survey.
Euro-area inflation unexpectedly slowed to 0.4 percent in July, the weakest since October 2009, a report from the European Union’s statistics office showed last month, underscoring the challenge faced by the ECB as it seeks to rekindle price growth. For the past 10 months the inflation rate has been weaker than 1 percent, less than half the ECB’s goal, while joblessness has remained near an all-time high.
Germany’s 10-year break-even rate, a gauge of the consumer-price outlook derived from the yield difference between regular and index-linked bonds, was at 1.19 percentage point today, matching the lowest on a closing-price basis since at least 2009, according to data compiled by Bloomberg.
Germany is scheduled to auction 4 billion euros ($5.3 billion) of 10-year bunds tomorrow. The nation last sold the debt on July 16 at a record-low average yield of 1.20 percent.
Spain’s 10-year yield dropped six basis points, or 0.06 percentage point, to 2.60 percent today. The rate on equivalent Italian bonds fell five basis points to 2.74 percent.
Bloomberg World Bond Indexes show German securities returned 6.3 percent this year through yesterday. That compares with an 11 percent gain for Spain’s, 9.8 percent for Italy’s and 3.9 percent for Treasuries.