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German government borrowing rates sub-zero for record period

Published 25/07/2019, 10:47
Updated 25/07/2019, 10:47
© Reuters. Frankfurt's financial district with Germany's second largest bank, Commerzbank (5thL), is photographed early morning  from Kronberg

By Dhara Ranasinghe and Ritvik Carvalho

LONDON (Reuters) - German 10-year bond yields have spent a record number of days in sub-zero territory, the latest sign of how entrenched expectations for weak inflation and ultra-low interest rates are impacting the euro zone's biggest economy.

Bond yields in Germany, the bloc's benchmark bond issuer, have slid this year alongside euro zone peers as investors brace for European Central Bank easing to fight stubbornly low inflation and protect the bloc from a bitter global trade war.

The 10-year German government bond or Bund yield fell below 0% (DE10YT=RR) in March and is on track to spend 80 days in sub-zero territory, based on Reuters calculations of the number of days the Bund yield had a bid low that was negative.

Graphic: Life below zero, https://tmsnrt.rs/2y8cw83

This surpasses the 79 days the German 10-year bond yield spent in negative territory in 2016.

That was the last time they went negative as the ECB ramped up quantitative easing (QE) to fight deflation and Britain's shock decision to leave the European Union sparked a rush into safe-haven, triple-A rated German debt.

Just seven months after ending QE, the ECB is on Thursday expected to signal a rate cut and possibly other easing measures soon.

Money markets price in a 10 basis point cut in the ECB's minus 0.40% deposit rate in September and a further cut is priced in by next March .

Deeply negative German yields echo moves elsewhere in the euro area as well as in Denmark and Switzerland -- where central banks also have negative interest rates.

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Some $13 trillion worth of bonds globally are estimated to be in negative territory, meaning investors are effectively paying governments and corporates to hold their bonds -- encouraging investors into riskier assets.

In 2016 signs of stronger economic growth and expectations for U.S. fiscal stimulus pushed bond yields back up globally, ending the German Bund yield's period in negative territory.

Today, analysts say factors such as a scarcity of high-quality government bonds, relatively low debt issuance from Germany and central bank buying suggest that long-dated German bond yields could stay sub-zero for some time.

Germany's Bund yield briefly fell below the ECB deposit rate for the first time in early June.

Peter Chatwell, head of rates strategy at Mizuho, says Bund yields could fall to minus 0.50% this year and minus 0.60% next year. "The entire German curve should move below 0%," he said.

For an interactive version of the below chart, click here (https://tmsnrt.rs/2YtKj7d).

Graphic: Bund yield set to fall below ECB deposit rate, https://tmsnrt.rs/2YqE2cu

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