German Yields Tumble Toward Zero

By Josie Cox 

        German government bonds smashed through record highs again on Thursday, a day after the European Central Bank underscored its commitment to buying vast amounts of top-rated debt to stimulate the region's economic recovery.
        By late morning, the yield on the country's 30-year bond had fallen as low as 0.468%, while the 10-year bond yield also hit a new low of just 0.085%. Germany's yield curve remained firmly in negative territory right out to January 2024. Yields fall as bond prices rise.
        German government debt is considered to be some of the lowest risk globally and therefore in particularly high demand for the ECB's EUR60 billion-a-month ($64 billion) quantitative easing program.
        ECB President Mario Draghi at a regular news conference on Wednesday repeated that the ECB intends to buy up to EUR1 trillion in bonds until September 2016--as announced in January--and restrict purchases to assets that yield more than the ECB's deposit rate of minus 0.2%.
        "Draghi pledged to continue to metaphorically stand on the roof of the ECB building and shower euro bank notes down upon passersby," said Paul Donovan, an economist at UBS.
        "[This] is distinctly positive for all eurozone fixed-income markets and especially Germany," said Peter Chatwell, a senior rates strategist at Mizuho International in London.
        The majority of bonds yielding above the ECB's deposit rate, that are eligible for purchase by the region's central bank, have been in demand in recent weeks. This demand was reinforced by Mr. Draghi's latest remarks, and many strategists have said that as the program progresses they are likely to rise further.
        "It is now just a question of time until we get to zero on the German 10-year bond yield," said Nick Gartside, head of fixed income at J.P. Morgan Asset Management.
        Wednesday's news conference also weighed on the euro against the dollar. The latter has soared over the past few months in anticipation of the U.S. Federal Reserve preparing to raise interest rates later this year or early next, in contrast to the ECB. On Thursday the euro was little changed against the dollar at around $1.069.
        The Stoxx Europe 600 equity index declined by around 0.5%, having Wednesday closed a shade under its all-time high. A lower euro is generally supportive of stocks, especially exporters who depend on demand from outside the bloc.
        Elsewhere Thursday, Greek markets remained in focus.
        The country's Syriza-led government has been locked in negotiations with its international creditors since coming to power in late January, with progress slow. It needs a deal by this summer to secure billions of euros in bailout aid to avoid defaulting on its debts and potentially exiting the euro.
        Compounding jitters, Standard & Poor's Ratings Services late Wednesday slashed its credit ratings on Greece debt deeper into junk territory, saying it expects the country's debt and financial commitments to be unsustainable without deep economic reform.
        Yields on the country's two-year bonds soared more than 3 percentage points on the day to almost 26%, their highest since being issued and a huge move even for notoriously volatile Greek debt. Yields rise when prices fall.
        Meanwhile, yields on the country's 10-year debt advanced by a little more than 1 percentage point to 12.6% -- their highest in over two years.
        A so-called inverted curve, where shorter-dated debt yields more than longer dated, indicates that investors see a heightened chance of default.
        "Overall the probability of a Greek exit remains higher now than it ever was," Barclays economists wrote in a note.
        So far this year, Athens' main stock index has declined around 10%, making it one of the world's worst performing indexes.
        In commodity markets, Brent crude was 0.8% lower on the day at $62.79 per barrel. Gold was 0.3% higher on the day at $1,204.80 per troy ounce. In the U.S., the S&P 500 was seen opening 0.1% lower. Futures, however, don't necessarily reflect moves after the opening bell.
        Write to Josie Cox at josie.cox@wsj.com
        (END) Dow Jones Newswires

        April 16, 2015 06:30 ET (10:30 GMT)

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