Reuters/London


Germany sold five-year debt at a record-low yield yesterday and its longer-term borrowing costs also fell to historic lows, as some investors bet European Central Bank bond-buying would outweigh hints of a recovery in the eurozone economy.
Growth and inflation show signs of picking up across the eurozone, which should put upward pressure on yields. But analysts say investors were focused on the ECB’s €1tn quantitative easing programme.
Although ECB purchases of German bonds are estimated to be over €11bn a month, the universe of bonds eligible for it to buy is shrinking as yields fall below the central bank’s lower limit of -0.20%. “The battle between these two forces is going to play out over the next few months,” said RBC strategist Peter Schaffrik.
“I think ultimately the economy wins and yields are going up, but in relative terms Bunds are going to stay rich versus other measures.”
In the latest sign of a eurozone revival, manufacturing activity across the bloc grew faster than previously estimated in March, a business survey showed yesterday.
Consumer prices may also start rising again soon.
Yet Germany managed to sell around €3.4bn of bonds maturing in April 2020 at an average yield of -0.10% yesterday.
All German bonds out to seven years now have negative yields. In effect, investors are paying for the privilege of lending to the country.
In secondary markets, German 10-year yields fell to a record low of 0.152%.
While the ECB cannot buy bonds at auction, or those of a similar maturity, analysts said the scale of the central bank’s QE scheme meant they were certain of a future buyer.
“Investors know that the ECB has to buy a lot of German bonds, so they can be certain they can sell these on,” said KBC strategist Piet Lammens.
ECB purchases per country are determined by the contribution to the central bank’s capital.
Consequently, it is expected to buy roughly 23% of Germany’s total debt stock—more than any other country. But with yields falling, fewer and fewer bonds are available. Commerzbank has calculated that 14% of German bonds with maturities above two years have yields below the lower ECB limit of -0.20%.
Demand for the eurozone’s top-rated debt is also being underpinned by uncertainty over whether Greece and its creditors will reach agreement on the reforms the country needs to pass to gain further bailout funds.
Without an agreement, Athens will run out of money later this month.
A conference call of eurozone deputy finance ministers is scheduled to take stock of developments, although a deal is not expected until next week.
Greek 10-year yields rose 27 bps to 11.94%. Yields in other low-rated bonds like Portugal, Italy and Spain slipped 1 to 2 bps lower.