Bond investors are comfortable with Germany’s government debt yielding below zero, according to Commerzbank AG, the nation’s third-biggest primary dealer.
That should help support the securities, even as Germany prepares for its first bond auction in two weeks. Bonds with negative yields, an unseen phenomenon before the region’s debt crisis, have become increasingly commonplace, and there are now $3.6 trillion of such securities in the Bloomberg Eurozone Sovereign Bond Index.
Germany’s sale of €4 billion ($4.5 billion) of five-year notes scheduled for Aug. 24 comes two days before Federal Reserve Chair Janet Yellen speaks at the Kansas City Fed’s annual Monetary Policy Symposium in Jackson Hole, Wyoming. German bunds rallied with treasuries earlier this week after minutes of the Fed’s July meeting showed officials were in no rush to raise US interest rates.
“The market feels pretty comfortable with subzero in 10-year bunds,” said David Schnautz, a fixed-income strategist at Commerzbank in London. “Ten-year yields should fluctuate subzero, and then we’ll take it from the interpretation of Yellen’s comments.”
Bond Yields
Germany’s 10-year bund yield rose eight basis points, or 0.08 percentage point, this week to minus 0.032% at London close on Friday. The 0% security due in August 2026 fell 0.769, or €7.69 per €1,000 face amount, to 100.321. The yield dropped to a record-low minus 0.205% on July 6.
Germany last bond auction was on Aug. 10, when it sold 10-year debt at an average yield of minus 0.09%.
German 10-year bund yields dropped below zero in the secondary market for the first time in the lead up to the UK’s June 23 referendum on its membership of the European Union. They have turned positive in just four days since Britain’s decision to leave the world’s biggest trading bloc.
A lack of supply this week gave investors little reason to sell bonds, as an account of the European Central Bank’s July policy meeting reiterated its “capacity and readiness” to add stimulus if required to meet its inflation goal.
German five-year notes yielded minus 0.495% Friday, having fallen to an all-time low of minus 0.635% on June 24, the day the results of Britain’s decision to leave the EU became clear.
While data next week are set to show that the eurozone economy has been resilient in the wake of the Brexit vote, futures pricing shows a more-than 40% chance that the ECB will cut its deposit rate by year-end.
