World Economy

German Bund Traders Await ECB News

Bunds have retained their attraction for investors.Bunds have retained their attraction for investors.

German bund traders are looking to the European Central Bank next week to shock the securities out of their slumber.

President Mario Draghi will comment on the latest policy decisions Sept. 8, breaking a seven-week pause that has helped keep benchmark German 10-year bund yields within a 10 basis-point, or 0.1 percentage point, range—the smallest since 1991. A day after investors digest the institution’s first policy decision since July 21, Germany auctions €5 billion ($5.6 billion) of the securities, Bloomberg reported.

Bunds have retained their attraction for investors, even with yields below zero for more than a month, as traders speculate that policy makers will expand quantitative easing to avoid a potential shortage of securities to buy, as well as to mitigate potential fallout from the UK’s decision to leave the EU.

“We expect an extension of the QE program by a six-month period, to September 2017,” said Michael Spies, a rates strategist at Citigroup Inc. in Frankfurt. “Also, we think that changes to QE modalities are likely to circumvent possible issues of bund scarcity.”

 No Longer Eligible

About two-thirds of the $1.14 trillion of securities in the Bloomberg Germany Sovereign Bond Index have yields below the ECB’s minus 0.4% deposit rate, making them ineligible for its QE purchases, under current rules.

The most plausible tweak to buying criteria is increasing the cap on bonds the ECB can buy, to 50% of a single issue from the current 33%, Spies said. Increasing the limit, which applies to bonds not bound by so-called collective-action clauses, “would trigger a sharp flattening rally in the near-term,” he said, referring to the yield spread shrinking between short- and long-term securities.

Benchmark German 10-year bund yields rose two basis points, or 0.02 percentage point, to minus 0.043% as of the 5 pm London close, finishing their fifth consecutive week below zero. The 0% security due in August 2026 fell 0.241, or €2.41 per €1,000 face amount, to 100.428. Yields on the securities remained within the same range of August.

Even as German bonds were stable in August, they managed to lose investors 0.7%, underperforming the 0.4% loss for eurozone bonds, according to Bloomberg World Bond Indexes.