Ger­man Bond rally seen en­dur­ing af­ter best month since 2012

The Pak Banker - - MARKETS/SPORTS -

This month's rally in Ger­man govern­ment bonds pushed the yield on Europe's bench­mark 10-year se­cu­ri­ties down by the most since May 2012, two months be­fore Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi pledged he'd do what­ever it takes to pre­serve the euro. An­a­lysts say there may be more to come.

Ger­many's 10-year bund yield dropped 30 ba­sis points in Jan­uary as tur­moil in fi­nan­cial mar­kets and the Bank of Ja­pan's adop­tion this week of neg­a­tive in­ter­est rates fu­eled de­mand for the rel­a­tive safety of fixed-in­come se­cu­ri­ties. Two-year note yields from Aus­tria to Ire­land slumped to fresh lows. And af­ter Draghi's sig­nal on Jan. 21 that pol­icy mak­ers may ex­pand stim­u­lus as soon as March, yields could fall still lower.

"Fun­da­men­tally the en­vi­ron­ment is quite sup­port­ive" for Ger­man bonds, said Vin­cent Chaigneau, global head of rates and for­eign-ex­change strat­egy at So­ci­ete Gen­erale SA in Lon­don. "In terms of port­fo­lio flows, that's go­ing to make western bonds more at­trac­tive, now that you have neg­a­tive rates in Ja­pan. It also some­how re­vives the cur­rency war theme and that raises the ques­tion about how ag­gres­sive the ECB could be in March."

Ger­man 10-year bund yields tum­bled 16 ba­sis points, or 0.16 per­cent­age point, this week to 0.33 per­cent as of the 5 p.m. close in Lon­don Fri­day, af­ter touch­ing 0.32 per­cent, the low­est since April. The 0.5 per­cent se­cu­rity due Fe­bru­ary 2026 rose 1.565, or 15.65 euros per 1,000-euro ($1,083) face amount, to 101.725.

Bond gains have ac­cel­er­ated as cen­tral banks world­wide seek to soothe mar­kets by giv­ing in­di­ca­tions of con­tin­ued easy mon­e­tary poli­cies. Ex­pec­ta­tions of fur­ther loos­en­ing by the ECB helped push Ger­many's five- year note yield below the ECB's de­posit rate of mi­nus 0.3 per­cent Fri­day.

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