Central Banks Outweigh Politics as Driver for German Note Rally

  • Nation’s two-year yield dropped to record low in February
  • ECB buying impact seen boosted by Swiss, Czech central banks

Marine Le Pen losing the race for the French Presidency may not spell the end of deeply negative yields on German short-dated debt.

While a demand for havens has supported the securities, they are also rallying as the European Central Bank extends its asset purchases to the lowest-yielding bonds. At the same time, central banks across the continent are ramping up their foreign currency-purchases, with short-dated, high-quality bonds a likely landing spot for their cash. Those flows will endure even if a mainstream candidate beats anti-euro Le Pen in the French elections, according to Commerzbank AG.

A report from the European Central Bank yesterday showed a drop in the weighted average maturity of German bonds bought under quantitative easing, while lending data from the ECB and Bundesbank points to a jump in the number of new purchases of sub-depo rate yielding bonds during the past two weeks.

Data this month has also shown more intervention in currency markets from the continent’s central banks. Swiss National Bank reserves surged by 24.2 billion francs ($23.9 billion) last month, the biggest increase in more than two years, the Czech central bank bought a record 15.3 billion euros ($16.2 billion) in January, while Denmark’s central bank also boosted foreign-currency sales. The Czech National Bank invests its foreign-currency reserves in high-rated bonds of other nations’ governments, stocks and other assets, Governor Jiri Rusnok told a business seminar on Tuesday in the northern city of Usti nad Labem.

“In the end it’s above and beyond all other factors except the Bundesbank with other central banks adding to demand on the margin,” said Michael Leister, the head of rates strategy at Commerzbank in Frankfurt. “At the very low levels seen last week, there’s only one buyer left and that’s sufficient to keep yields where they are.”~

2017 Outlook

The outlook from central banks in Europe bodes well for the shorter-dated bonds. The ECB remains committed to continuing stimulus at least until the end of the year, while record euro purchases from the Czech central bank may also endure as rate setters in Prague seek to keep a cap on appreciation until mid-2017. Meanwhile, the biggest increase in Swiss foreign reserves in more than two years last month also shows demand may linger as the central bank in Zurich fights to curb gains in the franc, although a Le Pen defeat may ease some demand for that nation’s currency.

German two-year yields fell five basis points to minus 0.87 percent on Tuesday, leading declines in Europe and approaching a minus 0.96 percent record-low last month. The securities were little changed on Wednesday.

Citigroup Inc. forecast a decline to below minus 1 percent this year, while Commerzbank cut its year-end forecast for two-year yields to minus 0.8 percent last week. Larger central bank and quantitative easing purchases in maturities shorter than five years may be responsible for 10 basis points in gains in German bond yields compared with swaps, Bank of America Merrill Lynch strategists including Sphia Salim said in a research note.

— With assistance by Stephen Spratt, Kristine Aquino, and Krystof Chamonikolas

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