German Bunds Reach New Milestone as Yield Declines Below Zero

  • Brexit risk, economic outlook stoke demand for havens
  • Nation follows Switzerland, Japan with negative 10-year yield

Markets and Bonds Feel Impact of Brexit Jitters

The yield on Germany’s 10-year government bund, Europe’s benchmark security, fell below zero for the first time on record, as investors’ seemingly insatiable demand for haven assets created another bond-market milestone.

The nation joined Japan and Switzerland in having 10-year bond yields of less than zero. The plunge in yields, which has been driven by European Central Bank’s policy of negative interest rates and asset purchases, has accelerated amid a weakening global economic outlook and as polls indicate the “Leave” campaign in Britain’s European Union referendum is gaining momentum.

“Nobody buys bunds at these yield levels thinking they are attractive,” said Jussi Hiljanen, head of European macro- and fixed-income strategy at SEB AB in Stockholm. “Demand for haven assets is being driven by fear of Brexit and growth concern. Investors are buying bunds as a hedge against uncertainty.”

Benchmark German 10-year bund yields fell three basis points, or 0.03 percentage point, to minus 0.003 percent at 4:23 p.m. London time, having touched minus 0.033 percent, the lowest since Bloomberg began collecting the data in 1989. The 0.5 percent security due February 2026 rose 0.26, or 2.60 euros per 1,000-euro ($1,120) face amount, to 104.86.

Haven Demand

Bond have been rallying around the world, with yields on 10-year U.K., Swiss and Japanese bonds also falling to records, as investors seek shelter before Britain votes on whether to exit the world’s largest trading bloc after a referendum next week. Five opinion polls from four separate companies have put the campaign for Britain to leave the EU in front of the ‘Remain’ camp.

A Bank of America Corp. survey published Tuesday showed Brexit is the biggest risk for fund managers, with allocations to bonds improving to the highest in three and a half years. Monetary policy reviews by the Federal Reserve and Bank of Japan this week are adding to the potential for volatility in financial markets.

While the collapse in yields is good news for governments that are reaping lower borrowing costs and in some cases command a fee to hold investors’ money, it’s a sign that even after pouring in record amounts of stimulus, central banks are still struggling in their efforts to boost growth and inflation.

Negative Yields

The German 10-year securities join the more than 40 percent of the $6.4 trillion of euro-region debt that already has yields below zero, according to the Bloomberg Eurozone Sovereign Bond Index, meaning investors who buy the bonds now and hold its to maturity will receive less than they paid.

“For savers this doesn’t have a significant meaning,” said Michael Koetter, professor for banking and finance at the Frankfurt School of Finance and Management. “It’s just another step toward negative yields being charged by banks for private customers’ current accounts.”

Germany’s yield has slid from 0.63 percent at the end of 2015. So far the drop in yield isn’t showing signs that it will ignite a reversal similar to what happened in April last year, when the previous record was followed by a selloff that pushed yields up by a full percentage point in less than two months.

Investor Concern

Even so, some investors are expressing concern. Negative yields are like “a supernova that will explode one day,” Bill Gross, the manager of the $1.4 billion Janus Global Unconstrained Bond Fund, said in a tweet last week, while Andreas Gruber, Chief Investment Officer of Allianz SE, which oversees 638 billion euros in assets, has said that German bunds are in “bubble territory.”

“There are better investments,” than negative-yielding German bunds, Kenneth Taubes, Pioneer Investment Management Inc.’s Boston-based head of U.S. investments, said in an interview with Bloomberg TV in London on Tuesday. “Every day you own a bond like that you compound a loss, and the only way to make money is when someone else is willing to pay a higher price. As a store of value I don’t see it as a very good investment.”

The rally in European bonds has also been fueled by central-bank action. German bunds have returned 4.8 percent since the ECB announced its asset-purchase program in January 2015, according to the Bloomberg World Bond Indexes.

Slower Inflation

While the plan, designed to help push annual consumer-price growth closer to the ECB’s goal of just under 2 percent, was expanded earlier this year, the move in German bunds is the latest sign it may be falling short. Prices have declined on an annual basis the past two months, while the five-year, five-year forward inflation-swap rate, a rolling gauge of inflation expectations, closed at the lowest level on record on Monday. Slower inflation is a boon for bondholders as it preserves the value of the fixed coupon payments they receive.

Current inflation numbers in the euro-zone are still low, though “growing risk aversion may explain why the drop in June was so outstanding,” said Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. “The market is taking a possible ‘Leave’ vote and the economic impact into consideration” for inflation expectations “after it had almost ignored it for a long time.”

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