German Bond Rally Pauses as BNP Eyes Return to Record-Low Yield

  • Bund yield dropped earlier to 0.18%, lowest in a week
  • ECB's 20 billion-euro bond-purchase expansion starts in April

German 10-year government bonds fell for the first time in four days, pushing yields up from their lowest level in more than a week, in a move some investors say will be limited as the European Central Bank prepares to step up its asset-purchase program next month.

Euro-area sovereign securities declined Monday after Federal Reserve Bank of San Francisco President John Williams said in an interview published by Market News International that a U.S. interest rate increase was possible in April or June. Yet, European bonds look set for a resurgence when the ECB expands its purchases at the start of April, according to BNP Paribas SA, France’s biggest lender. Before then, markets in the region will be closed March 25-28 for the Easter holiday.

The ECB cut all of its main interest rates, announced a 20 billion-euro ($23 billion) monthly increase to its quantitative-easing plan and revealed a new targeted-loan program on March 10. While the expansion of bond buying is effective from the start of April, corporate securities won’t be included until toward the end of the second quarter, potentially boosting demand for government debt.

‘More Favorable’

“With a four-day weekend ahead, there will probably be little risk taken,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. Yet “the bias is turning gradually more favorable for the government-bond sector going into April. Net supply next month will be strongly negative and we’ll have the extension of QE. The context is likely to be favorable for lower real yields.”

Germany’s 10-year bund yield rose one basis point, or 0.01 percentage point, to 0.22 percent at 4:15 p.m. London time. It fell earlier to 0.18 percent, the lowest since March 10. The 0.5 percent security due in February 2026 declined 0.115, or 1.15 euros per 1,000-euro face amount, to 102.705.

BNP Paribas predicts the benchmark German bund yield will fall in coming weeks toward its all-time low of 0.049 percent reached in April 2015, and slide below zero by year-end.

The potential for lower rates helped send yields across the region lower last week. The average yield on euro-area sovereign debt slid to 0.5 percent Friday, according to Bloomberg World Bond Indexes, approaching the 0.475 percent record low seen after the start of quantitative easing in March 2015.

Spain’s 10-year bond yield rose one basis point to 1.44 percent.

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