Germany’s Bond Rally Pushes 10-Year Yield Back Below Zero

Updated on
  • Core notes outperform as Bundesbank chief backs capital key
  • Portugal’s bonds halt slide as S&P affirms nation’s rating

Germany’s benchmark bonds rose, erasing a weekly decline and pushing 10-year yields back below zero, on speculation the European Central Bank has further to go in providing monetary stimulus.

The selloff following ECB President Mario Draghi’s failure to boost quantitative easing on Sept. 8 is fizzling out. Bonds from the euro zone’s core nations rallied relative to peripheral debt after Bundesbank President Jens Weidmann said the ECB should maintain the so-called capital key, which restricts central banks to buying securities only in proportion to the size of their economies.

Data Thursday that showed euro-zone inflation remains well short of the ECB’s goal only gave bond bulls more reason to anticipate a rethink by Draghi. There’s also speculation the Bank of Japan will ease further when it meets Sept. 20-21 after it announced it was reviewing its debt-buying measures.

“Taking 10-year bund yields as an example, we think fair value is below zero,” said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. “The markets have been really skittish and will probably remain so until next week, when we get more answers from central banks, particularly the Bank of Japan.”

The drop in Portuguese securities halted as the nation’s rating was affirmed by S&P Global Ratings. Ten-year yields still climbed 26 basis points this week, touching the highest since the Brexit result in June.

Capital Key

On the capital key, peripheral bonds have in the past been boosted by speculation that the rule would be relaxed, making it easier for the ECB to acquire alternatives to German securities.

The yield on Germany’s benchmark 10-year bund fell two basis points, or 0.02 percentage point, to 0.01 percent as of the 5 p.m. London-time close, after breaching the zero threshold for the first time since Sept. 9. The zero percent security due in August 2026 rose 0.24, or 2.40 euros per 1,000-euro ($1,116) face amount, to 99.926.

“We will see a lot of volatility, so I’m not sure if yields will go back to negative territory in a stable way or whether they’ll stabilize somewhere around zero,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “But certainly you shouldn’t expect a large rise in yields because you still have QE providing extreme support.”

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