German Two-Year Yields Drop to Lowest Since ECB March 10 Meeting

  • Benchmark bunds hold gains as European stock markets rally
  • Redemptions limit chance of 2015-style selloff: Commerzbank

Germany’s two-year note yields dropped to the lowest since the European Central Bank announced an increase to its stimulus program last month, signaling little concern that the country’s securities are set for a repeat of their April 2015 selloff.

The nation’s eight- and nine-year bund yields fell to the lowest on record. French three- and five-year note yields also declined to all-time lows before data this week that economists said will confirm consumer prices dropped on an annual basis for a second month in March, highlighting how far the ECB is from meeting its inflation goals.

Benchmark German 10-year bund yields touched the lowest in almost 12 months Monday even as European stocks reversed earlier declines. Pitted against the drop in yields is concern that debt securities could follow their trajectory from 2015, when a sudden jump of more than 1 percentage point from a record low in less than two months left some investors nursing losses. The Frankfurt-based central bank increased the size of its monthly bond purchases to 80 billion euros ($91 billion) from 60 billion euros starting April 1.

Debt Repayments

There’s less danger of that happening now because investors are more wary of being caught on the wrong foot and the market is likely to be supported by more than 50 billion euros of debt repayments this week, which will more than cover sales of 11 billion euros, according to Commerzbank AG.

“The latest leg lower in bunds and (semi-)core yields and the price dynamics so far this year create a certain sense of deja-vu given the striking similarities to last year,” Benjamin Schroeder, a Frankfurt-based interest-rate strategist at Commerzbank, wrote in an e-mailed note. “That being said, our models suggest that the QE premium embedded in 10-year bund yields is markedly lower than last year. The cash-flow profile is another supportive factor for core paper.”

Germany’s two-year note yield was little changed at minus 0.516 percent as of 10:25 a.m. London time, after touching minus 0.524 percent, the lowest since March 10. The price of the zero percent security due March 2018 was 101 percent of face value. Eight-year bond yields declined to minus 0.183 percent, while those on debt due in nine years reached minus 0.053 percent.

A negative yield means investors who purchase the securities now and hold them to maturity pay for the privilege of lending to the government.

Benchmark German 10-year bund yields were little changed at 0.09 percent, having dropped to 0.07 percent earlier, the lowest since April 21, 2015.

The euro area’s “unconvincing” economic data and rising political risk should support bonds even as this week’s redemption and coupon flows may prompt some countries to sell additional debt via banks, Peter Chatwell, London-based head of rates strategy at Mizuho International Plc, wrote in a client note.

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