Germany’s Sub-Zero Bond Yields Hard to Resist Amid Banking Woes

  • Country sells two-year notes at record-low yield below zero
  • ECB’s Draghi defends stimulus policies in closed-door meeting

Germany’s negative-yielding bonds are proving hard to resist.

Benchmark 10-year bunds held a two-day gain that on Tuesday pushed the yield to the lowest level below zero since July, as investors sought haven assets to allay concern that banking-industry woes in the euro area will deepen. They bought two-year notes in an auction on Wednesday at a record-low negative yield, even though the securities don’t qualify for inclusion in the European Central Bank’s asset-purchase program.

“The latest bout of risk aversion has really helped to push core yields lower,” said Martin van Vliet, an interest-rate strategist at ING Groep NV in Amsterdam. “In this environment, investors are willing to pay big time to own ultra-safe bonds. For now, these deeply-negative yields are here to stay.”

With German government securities overall yielding about minus 0.37 percent, as measured by the Bloomberg Germany Sovereign Bond Index, they still managed to outperform higher-yielding counterparts in the past week. That extended a rally which was sparked by the Federal Reserve’s Sept. 21 decision not to raise U.S. interest rates. European Central Bank President Mario Draghi on Wednesday vigorously defended his stimulus policies to critical lawmakers in Berlin, while reaffirming the urgency to step up structural reforms.

Benchmark 10-year bond yields were at minus 0.146 percent as of 4:58 p.m. London time, after sliding on Tuesday to minus 0.161 percent, the lowest since July 12. The price of the zero percent security due in August 2026 was 101.456 percent of face amount.

Why Buy?

A buy-and-hold strategy on that security looks to lose money. Yet acquiring it and selling in a month would produce a price gain of about 0.5 percent under a scenario in which the yield drops back to its record-low level reached in July of minus 0.205 percent, according to data compiled by Bloomberg.

Demand for securities from core nations in the euro area including Finland is getting a boost as investors put aside their disappointment from earlier in the month when the ECB refrained from increasing stimulus.

Relatively slow growth and subdued inflation had already fueled speculation that the central bank’s quantitative-easing program will be extended beyond the scheduled March 2017 expiry, boosting bonds across the board. And now the banking-industry concerns are emphasizing bunds’ safety features.

Deutsche Bank AG, eager to turn a tide of pessimism that drove its stock to record lows, on Wednesday dismissed speculation it will have to raise capital and announced the long-awaited sale of a U.K. insurance business for 935 million pounds ($1.2 billion).

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