World Economy

Eurozone Yields Fall With Japanese Influx Expected

Eurozone Yields Fall With Japanese Influx ExpectedEurozone Yields Fall With Japanese Influx Expected

Long-dated eurozone government bond yields fell on Tuesday with the Bank of Japan expected to enact measures that may push Japanese investors away from their country’s longer-maturity bonds and towards Europe and the United States.

The Japanese central bank is to end a key meeting on Wednesday and is widely expected to shift the primary focus of its monetary policy to negative interest rates, Reuters reported.

It is also expected to focus on “curve steepening”—increasing the yield on long-dated Japanese government bonds compared to shorter-dated debt by focusing its asset purchases at the short end.

“A super steepener announcement from the BoJ on Wednesday might have the effect of pushing down the yields of long-dated bonds in the US and Europe,” said David Schnautz, rates strategist at Commerzbank.

He said this would be driven by Japanese insurers and pension funds who generally need to own long-dated bonds to match their liabilities; potential losses on their holdings in JGBs could push them overseas.

“It’s risky in the long term because if the BoJ goes down this road, it may well be a signal for the ECB to the same thing as well. But the market seems to be moving on this short-term expectation at the moment,” he said.

The yield on 30-year German Bunds fell 5 basis points to 0.60%, and there were similar moves on Dutch, Finnish, French and Spanish 30-year government bonds.

Other eurozone bond yields also fell, if not quite so sharply. Germany’s 10-year Bund, the region’s benchmark bond, dropped 1.8 bps, turning back into negative territory.

Portugal outperformed, its 10-year yield dropping 4.3 bps to 3.34%, adding to a 10 bps fall in yields on Monday following S&P’s decision to affirm the country’s rating at BB+ and maintain a stable outlook.

Later on Tuesday, Germany’s debt management office may publish its issuance calendar for the fourth quarter of the year, and could cut its borrowing needs thanks to a strong budget performance, according to Commerzbank.

The Netherlands is to present its 2017 budget on Tuesday. ING strategists expect the funding need to be at least €5 billion ($5.59 billion) higher than 2016’s €74 billion figure, mostly driven by an increase in redemptions.

“The higher funding need will likely translate into a DSL issuance target of €35-37.5 billion—up from €25-30 billion this year,” the strategists said in a note.