Germany’s Note Auction Shows Investors Willing to Pay for Safety

  • Haven securities benefit from sluggish euro-region data
  • ECB seen holding policy steady while odds of Fed increase rise

Germany’s auction of five-year notes attracted record-low yields as investors judged that it’s still prudent to pay a fee to hold the safest sovereign securities.

That’s because a slowing euro-area economy may enable the European Central Bank to maintain its dovish policy bias even as U.S. interest rates look set to rise. German 10-year bund yields dropped to the lowest level in two weeks as a report showed manufacturing in the 19-nation currency bloc barely grew in May. European stocks fell for a second day, fueling declines in the bonds of high-deficit, high-debt nations and helping boost demand for haven assets.

Germany sold 4 billion euros ($4.5 billion) of debt due in April 2021 at an average yield of minus 0.38 percent, the lowest since Bloomberg started tracking the data in 1993. That compares with a yield of minus 0.33 percent at a previous offering of the same securities on May 4. Negative yields mean investors who buy now and hold the debt until maturity will get less than what they paid.

German sovereign debt returned 1.1 percent in the past month through Tuesday while holders of Treasuries have been left with no gains, according to Bloomberg World Bond Indexes. That may reflect the prospect of a prolonged period of monetary stimulus in the euro area as the ECB buys assets under its public-sector purchase program, while the Federal Reserve is preparing to raise U.S. interest rates as early as this month.

‘Partial Decoupling’

“It makes sense to have a partial decoupling between the U.S. and euro curves because the U.S. is reacting more to recent Fed comments,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. In the euro area “we still have the PSPP, which is a strong support, and we have evidence that when the 10-year bund is close to 20 basis points, there is strong support, so clearly there’s a lot of protection,” he said.

Benchmark German 10-year bund yields were little changed at 0.14 percent as of 4:08 p.m. London time, after falling to 0.12 percent, the lowest since May 16. The price of the 0.5 percent security due in February 2026 was 103.495 percent of face value. The yield declined three basis points, or 0.03 percentage point, Tuesday, the most since May 13.

The yield on similar-maturity Italian bonds increased three basis points to 1.39 percent, while that on Spanish 10-year bonds added three basis points to 1.50 percent. The Stoxx Europe 600 Index of shares slid 1 percent, after dropping 0.8 percent Tuesday.

A report Wednesday showed euro-area manufacturing grew at a slower pace in May, damping confidence in the strength of the region’s economic recovery. Markit Economics’ Purchasing Managers Index slipped to 51.5 from 51.7 in April, the London-based company said. The reading was in line with a May 23 estimate and above the 50 threshold that divides expansion from contraction.

The ECB is expected to keep its stimulus plan unchanged Thursday, according to economists surveyed by Bloomberg. The central bank announced in March an expansion of its monthly asset-purchase program by a third to 80 billion euros and a cut to the deposit rate further below zero. The odds of a U.S. rate increase by the end of the year implied by federal funds futures contracts were at 77 percent Wednesday, from 58 percent at the end of April.

Before it's here, it's on the Bloomberg Terminal.