Eurozone yields steady amid year’s first wave of high-grade supply

LONDON: Eurozone government bond yields resisted upward pressure from new supply and a rise in US and Japanese peers yesterday, underscoring the strong demand for European assets in the market.

On a day when three euro zone countries held their first auctions of 2018 and 10-year US Treasury yields hit their highest since March on news the BoJ had trimmed its purchases of long-dated Japanese government bonds, yields were flat to a touch lower across the eurozone.

Germany, the Netherlands and Austria sold over 3.5 billion euros of bonds between them, receiving strong demand from investors. The yield on all three countries’ debt has risen in recent weeks as the European economy motors on. High-grade bonds tend to underperform in benign conditions as investors switch to riskier assets with better returns. But as a result of the sell-off, those bonds are now looking attractive, analysts said.

“The broader picture is yields are still low but we still need to be excited a bit on this (upward) move in the last few weeks,” said ING strategist Martin Van Vliet.

The yield on the region’s benchmark, German 10-year debt, was flat at 0.43 percent yesterday, well above the mid-December level of 0.30 percent. The Dutch equivalent was also flat at 0.52 percent but was about 16 bps higher than its December low, while Austria has seen its 10year borrowing costs increase 18 bps over the past month to 0.57 percent.

In a continuation of a recent trend, Southern European debt outperformed, and the gap between Spanish and German bond yields was at its tightest since September. Normally, an improvement in economic conditions would cause investors to be cautious about buying government bonds as it makes an early end to the European Central Bank’s bond-buying scheme more likely. But with inflation yet to show a sustained increase, investors would feel reasonably safe buying debt. “To me, the current Bund yield level makes sense given economic data looks rock solid. The only thing we’re all waiting for is signs of inflationary pressure,” said Van Vliet.