Germany's Bonds Seen Running Out of Reasons to Rally Next Week

  • Benchmark bund yields extend biggest monthly drop since 2012
  • Traders have priced in a cut to ECB's deposit rate in March

The stellar performance in German government bonds over the past few weeks may finally run out of steam.

With markets already pricing in additional easing measures from the European Central Bank and bets on a Federal Reserve interest-rate increase this year fading, options traders are challenging the rally. Germany’s two-year note yields dropped below minus 0.5 percent for the first time this week, while benchmark 10-year bund yields fell to the lowest since April, when investors balking at low yields sparked a global bond selloff.

“We would need more risk-off moves to justify 10-year bund yields below 30 basis points,” said Alexander Aldinger, a senior government-bond analyst at Bayerische Landesbank in Munich. “We don’t foresee that for next week. We think we’ve reached a lower bound here and we’ll establish a new range between 30 and 40 basis points.”

German 10-year bund yields fell three basis points, or 0.03 percentage point, this week to 0.30 percent as of the 5 p.m. close in London Friday, extending this year’s decline. The 0.5 percent security due February 2026 rose 0.29, or 2.90 euros per 1,000-euro ($1,113) face amount, to 102.015, this week. The yield tumbled 30 basis points in January, the steepest monthly decline since May 2012.

The nation’s two-year note yield was minus 0.495 percent, after falling to a record-low minus 0.502 percent on Wednesday.

Germany is scheduled to auction securities due in March 2018 next week. A Feb. 3 sale of five-year notes was the third consecutive auction to attract fewer bids than the debt agency’s goal.

High-rated sovereign debt has been gaining this year as a collapse in oil prices and a selloff in global equity markets fueled concern that global growth is slowing. The ECB has said it will review its policy stance next month and Executive Board member Yves Mersch said Feb. 4 that said the central bank’s toolbox was not exhausted.

Growth Data

Data next week will show the euro-area economy grew 0.3 percent in the fourth quarter, the same pace as the previous three months, according to the median forecasts of analysts in a Bloomberg survey. This week the European Commission cut its prediction for 2016 growth in the 19-nation bloc.

Traders have priced in a 10 basis-point cut to the ECB’s minus 0.3 percent deposit rate in March, according to forward contracts based on the euro overnight index average, or Eonia. Some economists are also calling for an increase to the pace of the central bank’s asset-purchase program, which currently stands at 60 billion euros a month.

The options market is adding to signs that the gains in German securities may end. Investors are paying a higher premium to lock in prices to sell 10-year bund futures contracts than buy them. That came as the contract climbed to a record this week, encouraging some traders to take downside bets.

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