German 10-yr bond falls below zero

Yields on the 10-year bund, a traditional safe haven, have tipped below zero for the first time amid regional worries.

German bond yields have been dpressed by ECB policy and Brexit fears. Picture: AFP.

Yields on the 10-year government debt of Germany dipped below zero on Tuesday for the first time on record, in a dramatic sign of the outsize effect of central-bank policy and investors’ search for safe havens.

The yield on the bund fell to minus 0.001 per cent from around 0.002 per cent when European markets opened, according to data from Tradeweb.

Government-bond yields have been falling for the past year across the developed world as investors look for safety and central banks push interest rates close to zero and into negative territory. The European Central Bank has contributed to the fall in bund yields through its massive bond-buying program, aimed at lowering financing costs across the eurozone.

On Tuesday, concerns that the UK will vote to leave the European Union after a referendum next week added to the mix, pushing investors further into safe assets such as the bund. Opinion polls are increasingly pointing to a so-called Brexit on June 23, spurring concerns about a stretch of uncertainty that could hurt the global economy.

“There’s been a flight to quality as a result of political risk -- the UK referendum is coming, followed by Spanish elections three days later,” said Justin Knight, head of European rates strategy at UBS. Spain goes to the polls on the June 26 in an election that could extend political deadlock in the country.

For investors, the bund’s move below zero highlights an investment world of increasingly low returns. The 10-year bund joins some $US10 trillion worth of global sovereign debt with negative yields.

“It’s psychologically very different,” said Paul Flood, a multi-asset manager at Newton Investment Management. But that doesn’t mean other assets aren’t worse that negative yielding government debt, with the potential to offer even lower returns, he said.

The Euro Stoxx index of equities in the eurozone, for example, is down 13.9 per cent during 2016 so far. Japan’s Nikkei is down even further, with a 15.8 per cent decline since the year began.

A handful of corporate bonds too, have joined the negative yield club. Anglo-Dutch consumer goods giant Unilever, and French luxury goods firm LVMH have bonds maturing in 2020 and 2019 respectively, both of which dipped into negative yield territory on Monday.

The 10-year bund joins a swath of other German government debt currently offering a zero or negative yield. Last week, German lender Commerzbank AG estimated that almost two-thirds of outstanding German sovereign debt now yields below minus 0.4 per cent.

Bunds have been a popular safe haven since at least the 1970s, when the German Bundesbank gained kudos for avoiding the high inflation of other advanced economies.

Germany is one of only a handful of countries with a triple-A rating from all the major rating firms and has a constitutional law that limits future annual deficits to 0.35 per cent. It is also the biggest of those countries, meaning it has a comparatively large amount of debt that makes the market easy to move in and out of for investors, adding to its attractiveness.

In an era when the yields on government debt -- from Japan to the UK -- have been plummeting to almost uncharted territories, analysts have long bet that the 10-year bund would fall below zero.

That nearly happened in early 2015, but yields spiked back up, in what became known as the “bund tantrum,” from nearly zero to 1 per cent in less than two months when credit across Europe was sold off and yields jumped. But yields soon headed lower again.

Yields move in the opposite direction to prices, so higher market prices for bonds mean lower yields.

Some analysts believe that bund yields could go even lower as prices rally over the summer.

“If there’s more Brexit uncertainty ahead of the vote, there’s no reason that the 10 year yield can’t fall lower,” said Joerg Kraemer, chief economist at Commerzbank AG.

Analysts also note that bund prices tend to rally over the over the summer.

“A seasonal bullish phase has occurred since 2004,” said analysts at BNP Paribas in a research note. “Bunds will soon enter that bullish phase.”

The bank said that yields on the 10-year bund have fallen by an average 0.14 percentage point from the third week of June to mid-July for several years.

But the frenzy of buying that has pushed so much debt into negative territory has sparked warnings about the potential of large losses if interest rates rise. That is particularly so when longer-term debt, such as the 10-year bund, moves below zero.

The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.

Riva Gold and Friedrich Geiger in Berlin contributed to this article.

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