German Bonds Rise as 10-Year Auction Achieves Record-Low Yield

  • Euro-zone debt rally sees Spain’s 10-year yield set new low
  • There’s also a ‘spillover’ from BOE QE program, ING says

German government bonds rose as the nation sold 10-year debt at a record-low yield.

The bunds were allotted at a yield of minus 0.09 percent, surpassing the previous all-time low of minus 0.05 percent at an auction on July 13. Securities climbed across the euro region on the prospect of looser monetary policy by the European Central Bank, with 10-year Spanish yields setting fresh lows.

Investors in Germany’s auction bid for 5.7 billion euros ($6.4 billion) of bunds, compared with a sales goal of 5 billion euros. That’s a turnaround from the nation’s 10-year offerings in June and July, when it failed to reach its targets.

“This was the first covered 10-year auction since May,” said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. “Demand was quite strong considering these low yields.”

Easy-money policies across the developed world have sent sovereign-bond yields tumbling to records. That’s making shorter-term debt less attractive and encouraging investors to opt for longer maturities to boost their returns. About 84 percent of securities in the Bloomberg Germany Sovereign Bond Index currently yield below zero.

Fine Tuning?

While the ECB refrained from announcing any changes to its bond-purchase program in July, it did say officials would keep an eye on the impact of Britain’s decision to quit the European Union. That spurred speculation the ECB will fine-tune quantitative easing in coming months, which may see yields drop further. Even in the U.S., futures prices suggest a less-than 50 percent chance of a 2016 rate increase.

German 10-year bund yields fell three basis points, or 0.03 percentage point, to minus 0.11 percent as of 4:30 p.m. London time. The zero percent security due in August 2026 rose 0.31, or 3.10 euros per 1,000-euro face amount, to 101.079.

The yield reached an all-time low of minus 0.205 percent on July 6.

Spain’s 10-year bond yield tumbled five basis points to 0.95 percent, after reaching a record-low of 0.944 percent, while Italy’s dropped four basis points to 1.08 percent, touching the lowest in more than a year.

Euro-zone bonds were also boosted by a rally in gilts after the Bank of England’s purchase of longer-dated debt on Tuesday failed to meet its target. Ten-year gilt yields touched a record-low of 0.512 percent on Wednesday, before paring their slide following that day’s more successful reverse auction.

For more on the gilt-market reaction to the BOE’s operation, click here.

With the bund offering “out of the way, that opens the door to all the spillover effects from the U.K. to be visible,” said Martin van Vliet, an interest-rate strategist at ING Groep NV in Amsterdam. “Also, with the next two weeks seeing no supply whatsoever, in these thin markets you get big moves.”

A drop in 10-year German yields toward minus 0.15 percent “could easily happen in the next couple of weeks if the trends are sustained,” he said.

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