Germany's Whole Yield Curve Dives Below 0% for the First Time

(Bloomberg) -- German 30-year bonds rallied to send yields across the whole of its debt market below 0% for the first time after President Donald Trump ratcheted up the U.S. trade war with China.

The euro area's biggest economy joined Denmark and Switzerland in the region in offering negative returns to investors should the notes be held to maturity, taking the total stock of investment-grade debt yielding less than 0% to $14 trillion globally.

The move will add to fears that the region's economic slowdown is being driven by more structural factors akin to Japan's “lost decade.” Germany's bond market is widely perceived as being one of the world's safest, with investors lured in by the liquidity and credit quality offered. Funds still looking to extract a positive return from European sovereign assets have been forced further out the yield curve or into riskier debt markets such as Italy.

“It underlines that the hunt for yield, or rather hunt to avoid negative yields, is accelerating day by day,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “It just makes things more complicated.”

Yields on 30-year bunds fell almost 10 basis points to -0.002%. Those on 10-year securities dropped five basis points to -0.50%, also a record low and below the European Central Bank's -0.40% deposit rate.

Trump's intention to impose more tariffs on Chinese goods fueled a haven bid for bonds, with yields dropping globally. The Federal Reserve cut interest rates Wednesday, but Chair Jerome Powell said it wouldn't be part of a more prolonged easing cycle. The ECB, meanwhile, looks set to introduce a new package of stimulus measures at its September meeting.

Germany's bond market is also being increasingly plagued by a problem of scarcity, with the government mandated by law to effectively maintain a budget surplus. The ECB holds nearly a third of the existing debt, leaving less to trade, which has helped to compress yields even further.

“It is a combination of a very uncertain economic outlook, a central bank that left all doors open in terms of new easing measures, the absence of inflation and vigorous search for yield,” said Jan von Gerich, chief strategist at Nordea Bank AB. “It was almost bound to happen.”

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

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net

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