Ger­many's haven sta­tus en­hanced with bonds seen ex­tend­ing gains


Ger­many's gov­ern­ment bonds may ex­tend gains next week as in­vestors seek haven as­sets af­ter China's man­u­fac­tur­ing ac­tiv­ity plunged to a six-year low and an in­dex of com­mod­ity prices touched the low­est level since 2002.

Yields on Ger­man 10-year bunds, Europe's bench­mark sov­er­eign se­cu­ri­ties, fell to their low­est level in more than two months af­ter Greek Prime Min­is­ter Alexis Tsipras stepped down to force an early elec­tion, cloud­ing the po­lit­i­cal out­look. The yield premi­ums, or spreads, that in­vestors get for hold­ing the re­gion's higher-yield­ing debt in­stead of sim­i­lar-ma­tu­rity Ger­man bunds may in­crease, ac­cord­ing to Danske Bank A/S. "There has been a lot of riska­verse trad­ing," said Jens Peter So­erensen, chief an­a­lyst at Danske Bank in Copenhagen. "The Greek vote news and the de­cline in oil and emerg­ing mar­kets has seen spreads widen be­tween pe­riph­er­als ver­sus core bonds. So where do you pre­fer to stay? You will stay in bunds."

Ger­many's 10-year bund yields dropped 10 ba­sis points, or 0.1 per­cent­age point, this week to 0.56 per­cent at the 5 p.m. close in Lon­don on Fri­day, the low­est since June 2. The 1 per­cent se­cu­rity due Au­gust 2025 climbed 0.945, or 9.45 eu­ros per 1,000-euro ($1,136) face amount, to 104.22. So­erensen said Ger­man bund yields "can easily go lower" and, if they breach 0.5 per­cent, could drop to 0.25 per- cent in the next one to two months. The yield spread be­tween Ital­ian 10-year se­cu­ri­ties and Ger­man bunds widened to as much as 130 ba­sis points Fri­day, the most since July 14. Italy's 10-year bond yield in­creased five ba­sis points this week to 1.86 per­cent.

Signs of a deep­en­ing slow­down in China's econ­omy and tum­bling com­modi­ties stoked de­fla­tion­ary fears, boost­ing de­mand for the safest fixed-in­come se­cu­ri­ties. Min­utes of the Fed­eral Re­serve's July meet­ing re­leased Aug. 19 also prompted in­vestors to push back their out­look for in­ter­est- rate in­creases. "The fo­cus will be on in­fla­tion and oil prices and if they con­tinue to trend lower," So­erensen said.

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