German Yields Fall Below ECB Deposit Rate as Governments Cash In

(Bloomberg) -- The yields on Europe's safest bonds have fallen below the European Central Bank's deposit rate for the first time as investors bet on policy easing.

German 10-year yields slid below the minus 0.40% rate that the central bank pays on money parked with it. That is spurring investors to turn to riskier assets such as Italian and Greek notes that are leading a rally in European bonds this week. Governments are cashing in, with both Spain and France auctioning debt at record-low borrowing costs on Thursday.

The move to more deeply negative yields supports the view that Europe may be following in the footsteps of Japan's troubles to revive low inflation and growth. Global investors find bunds attractive even at current levels given that they offer positive returns after hedging for currency swings. Analysts predict yields will keep falling on conviction that Christine Lagarde, who is set to succeed Mario Draghi as European Central Bank president, will increase stimulus either through rate cuts or quantitative easing.

“The markets are really saying we expect more from the ECB,” Marilyn Watson, head of global fundamental fixed-income strategy at BlackRock Inc., told Bloomberg TV. “We expect yields to go lower still.”

Germany joins the U.S., Japan, Canada and the U.K. in having benchmark bond yields below the key interest rate, raising pressure on central banks to push more money into the economy. It may also induce governments to raise fiscal expenditure if they are effectively being paid to borrow.

Benchmark 10-year German yields have fallen eight basis points this week to a record-low minus 0.41%. Italian bonds have outpaced the bund rally to narrow the spread between the two to below 200 basis points Wednesday, the lowest since May 2018.

Ten-year securities in Belgium, France and the Netherlands have already joined the sub-zero club, adding to a 13 trillion dollar global pile of negative-yielding debt. France sold a total of 10 billion euros of 10- and 15-year bonds at record-low yields, while Spain sold 3.5 billion euros of debt across the curve.

The ECB can currently buy bonds that yield less than the deposit rate, though priority is given to those that still offer a premium. In Germany, there are scant securities left in that category with 20-year yields also turning negative this week, although Draghi has hinted the ECB could tweak rules on the level of debt the institution can hold.

Bond markets may be relieved that German Bundesbank President Jens Weidman didn't get the ECB job, given his previous opposition to QE, said Mark Holman, chief executive officer at TwentyFour Asset Management that oversees about 14.3 billion pounds ($18 billion). Instead Lagarde, who was an early proponent of QE for the euro zone, has the political nous to do well, he said.

“Our sense is that she will continue to err on the side of caution, which is what markets would like,” Holman said.

For ADM Investor Services, the huge stock of bonds yielding below zero might pose risks further down the line if the global economy shows signs of a rebound in the second half of the year. The U.S. faces jobs data Friday.

“There's too much cash looking for a safe haven home,” said Marc Ostwald, a global strategist at ADM. “Bonds are in for a rough ride.”

--With assistance from James Hirai and Francine Lacqua.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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