Germany Sells Notes at Sub-Zero Yields as Mizuho Eyes ECB Limits

  • Bundesbank could reach some purchase limits by April: Mizuho
  • Germany sold five-year notes at lowest yield since April

Germany sold five-year government debt with a negative yield for the first time since April amid speculation that the Bundesbank may reach its limit on some bond purchases months before the intended completion of the European Central Bank’s stimulus plan.

Benchmark German 10-year bunds advanced along with their euro-area peers as European stocks fell for a third day, boosting demand for fixed-interest assets. The ECB tweaked its 1.1 trillion-euro ($1.3 trillion) quantitative-easing program last month by raising its cap on some of the bonds it can buy to 33 percent per security from 25 percent, President Mario Draghi said on Sept. 3. The increase was applied to those bonds not bound by collective-action clauses, or CACs.

Germany sold 3 billion euros of five-year notes at an average yield of minus 0.03 percent Wednesday, the lowest at auction since April 29. A negative yield means investors buying the securities now will get back less upon maturity than they paid.

Purchases made since the ECB started QE in March have left the Bundesbank owning half of what it’s allowed to buy in any given CAC bonds, compared with 36 percent in non-CAC bonds, according to analysts at Mizuho International Plc, including Peter Chatwell, London-based head of rates strategy.

ECB Purchases

Euro-area central banks bought more than 340 billion euros of public-sector debt under their QE plan through the end of September, ECB data released on Oct. 5 showed. Policy makers have said they intend to continue the stimulus plan until at least September 2016. The German central bank “will hit the issue limits on some CAC bonds as early as April next year,” the Mizuho analysts predicted.

“The market will take this into consideration long before by pricing non-CAC bonds at a premium” the analysts wrote in a note to clients dated Oct. 14. “This is particularly true now that the extension” of the ECB’s bond-purchase program “beyond September 2016 is widely expected,” they said.

CACs are designed to make a debt exchange that is accepted by a qualified majority of bond holders binding to all, limiting investors’ rights to oppose writedowns on the securities. In accordance with a treaty establishing the European Stability Mechanism, the permanent rescue fund set up after the euro-area debt crisis, all bonds sold by governments in the region since Jan. 1, 2013, must have the clauses attached.

German 10-year bund yields fell four basis points, or 0.04 percentage point, to 0.55 percent at 4:13 p.m. London time Wednesday. The 1 percent security due in August 2025 rose 0.41, or 4.10 euros per 1,000-euro face amount, to 104.345.

The yield on French 10-year bonds dropped four basis points to 0.92 percent, and touched 0.90 percent, the lowest level since Oct. 5. Similar-maturity Austrian bond yields slid five basis points to 0.82 percent. The Stoxx Europe 600 Index of shares declined 0.7 percent.

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