Negative Yield on Four-Fifths of German Bonds Leaves Market Wary

Updated on
  • Germany-Spain 10-year yield spread falls to lowest in 2016
  • Central banks, falling oil prices still provide support

Germany’s government bonds held a two-day drop as the nation auctioned two-year securities at a time when some investors are questioning the sustainability of a rally that’s pushed the yield on more than 80 percent of Europe’s benchmark sovereign securities below zero.

The country’s bonds have performed worse than so-called peripheral debt in the past week, pushing the extra yield, or spread, that investors get for holding similar-maturity Spanish debt to the lowest since December. Germany sold 5 billion euros ($5.6 billion) of notes due in September 2018, a day after a weak 10-year bond auction in Japan helped fuel a global selloff.

The rally in government bonds is being questioned, even as central banks inject monetary stimulus. Falling yields had been accelerating after Britain’s decision in June to leave the European Union reignited concern that economic growth would slow. Against that, a sluggish economy and a 20 percent-drop in oil prices from their June peak has kept the average yield on euro-area bonds within five basis points, or 0.05 percentage point, of a record low reached last week.

‘Lofty Levels’

“Bunds have reached such lofty levels that from a risk-reward point of view, there is no sense in buying them,” said Mathias van Der Jeugt, a strategist at KBC Bank NV in Brussels. “But on the other hand, we expect rates to remain near low levels” meaning it’s not a perfect time “to start shorting them,” he said, referring to placing bets that an asset’s price will decline.

Germany’s 10-year bund yield was little changed at minus 0.035 percent as of 4:03 p.m. London time, after rising eight basis points over the previous two days. The price of the zero percent security due in August 2026 was 100.35 percent of face value. The yield has climbed from a record-low minus 0.205 percent set on July 6.

Germany allotted its two-year notes at an average yield of minus 0.6 percent, compared with a record-low yield of minus 0.69 percent at a previous sale on July 6. The securities are ineligible for the European Central Bank’s asset-purchase program because they yield less than the deposit rate, which is currently minus 0.4 percent.

More than four-fifths of German government debt yields less than zero, as measured by the Bloomberg Germany Sovereign Bond Index.

Spanish 10-year bond yields rose one basis point to 1.09 percent, leaving the spread with German bunds at 112 basis points, having earlier been as low as 110 basis points. The gap has narrowed from as much as 194 basis points as Britain’s decision to leave the European Union was confirmed on June 24.