German Bonds Post Their Longest Weekly Run of Gains Since QE

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  • French, Dutch 10-year yields also dropped to records this week
  • Sub-zero yield not ‘bizarre’ for risk-averse investors: HSBC

German government bonds completed their longest run of weekly advances since the European Central Bank announced its bond-purchase program in January last year.

Yields on benchmark 10-year German bunds fell to a record this week along with those on French and Dutch sovereign-debt securities amid speculation the European Central Bank will loosen monetary policy further in coming months. Britain’s vote to leave the European Union is adding to headwinds for a global economy that was already slowing.

Political risks in the region and Italy’s banking crisis have also fueled demand for fixed-income assets, pushing yields on more than half the $6.4 trillion Bloomberg Eurozone Sovereign Bond Index to less than zero. While it may seem “bizarre” to buy bonds that virtually guarantee a loss, it makes sense for investors who want to preserve their capital, according to HSBC Holdings Plc, Europe’s largest bank.

“The Brexit referendum and a more general risk-off mood” are pushing yields lower, said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “This downward spiral is also fueled by the ECB’s QE program.”

U.S. Payrolls

The German 10-year bund yield fell two basis points, or 0.02 percentage point, on Friday to minus 0.19 percent as of 4:45 p.m. London time, leaving it six basis points lower since July 1. That’s the seventh week of declines, the longest since Jan. 30, 2015. The yield reached a record-low of minus 0.205 percent on July 6. The 0.5 percent security due February 2026 rose 0.175 or 1.75 euros per 1,000-euro face amount, to 106.67.

Bunds held their weekly gain even as a report showed U.S. payrolls jumped in June by the most in eight months. Italian and Spanish bonds also rose.

The ECB boosted its asset monthly purchases to 80 billion euros earlier this year as it struggled to boost inflation toward its goal of around 2 percent. More than half of German bonds are now ineligible for purchase under the public-sector purchase program after yields fell below the deposit rate of minus 0.4 percent, prompting speculation the central bank would face constraints in implementing its stimulus program.

ECB officials, led by President Mario Draghi, first announced their intention to start QE in January 2015, with the program commencing in March that year. It was initially due to run until September 2016, before being extended by six months.

“It does seem counter-intuitive to enter into an instrument that will lose money but it will lose less money than some of the other asset classes,” Steven Major, head of fixed-income research at HSBC, said in an interview on Bloomberg Television’s “On The Move” with Guy Johnson and Caroline Hyde. “It may seem bizarre to lock in what is effectively a loss but then you are trying to minimize that loss and you’re trying to maintain your capital where possible.”