Germany's Auction of Negative-Yielding Notes Highlights Gloom

  • Shorter-dated notes outperform benchmark 10-year bunds
  • Portugal bonds extend drop as nation said to sell debt

Germany’s two-year note sale on Wednesday provided more evidence that an increasingly gloomy economic outlook in the euro zone keeps driving investors to buy negative-yielding securities in return for their safety -- and potential capital gains.

The country’s bonds, which have returned 4.4 percent percent this year, fell as Europe’s largest economy allotted 3.24 billion euros ($3.7 billion) of securities maturing in 2018 in an auction, with an average yield of minus 0.48 percent. Ten-year bunds declined, pushing yields up from the lowest in almost a year.

Gains in 2016 had pushed the two-year note yield down to a record-low minus 0.586 percent on March 4, six days before the European Central Bank cut its main interest rates and increased the monthly size of its asset purchases by one-third. Its actions gave fresh support to debt that now yields less than zero for as long as nine years.

Negative yields have proved to be no major deterrent in auctions. The previous sale of two-year on March 9 debt attracted bids equivalent to more than two times the amount sold, even as investors settled for an average yield of minus 0.55 percent. Germany’s industrial production fell in February from January, providing another reminder of the economic challenges facing the region.

Yield Bias

“Clearly there is bias toward lower yields across the board,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris, who sees the German 10-year yield falling to less than zero this year. “All the factors are favorable for an extension of the recent rally.”

Germany’s two-year note yield was little changed at minus 0.489 percent as of 4:24 p.m. London time, with the price of the zero percent security maturing in March 2018 at 100.955 percent of face value.

The yield on benchmark 10-year bunds rose two basis points, or 0.02 percentage point, to 0.12 percent, after falling on Tuesday to less than 0.1 percent for the first time since April 2015.

Portugal’s 10-year yield climbed four basis points to 3.19 percent, after touching the highest since Feb. 26, as the nation prepared to sell 2022 and 2045 debt via banks, according to a person familiar with the matter.

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