Article Highlights

  • German 10s/30s spread at tightest in over five weeks
  • Solid demand at German 30-year bond auction
  • LCH raises margin on Italian debt, pushing yields higher
  • But Italian yields still close to five-week lows
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The premium investors demand to hold Germany’s long-dated bonds over benchmark 10-year debt was at its lowest level in over five weeks, pushed lower by bets on ECB action and concerns over long-term growth in Europe and beyond.

The gap between German 10- and 30-year bond yields was at 67 basis points, though this was pushed flatter by a recent change in the German 10-year benchmark from the February 2028 to the August 2028 Bund.

In addition, investors turned up in numbers for an auction of 30-year bonds from the German debt agency, with demand well exceeding the targeted sale amount of 1 billion euros.

“Over the past few weeks, ECB policy expectations have been a bullish driver for euro area bonds in general and also for the German Bund yield curve,” said Commerzbank rates strategist Rainer Guntermann.

He was referring to source-based stories suggesting that the European Central Bank will use redemptions from its bond holdings to buy longer-dated government debt even after its bond-buying scheme closes at the end of 2018.

“Also there is a bit of uncertainty over global growth which is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt,” he added.

Longer-dated debt benefits from this hunt for yield, as does lower-rated government debt such as that of France and Belgium and also “peripheral” Southern European countries, he said.

With German 10-year yields remaining persistently low — they were at 0.34 percent on Thursday, less than half the yearly peak of about 0.81 percent — other euro zone debt has benefited.

The French and Belgian 10-year bond yield spreads over the German 10-year bond are at their lowest since late May at 28-29 bps.

Most high-grade euro zone bond yields were about a basis point lower on Wednesday across the board.

MARGIN WARNING

Italian yields had also dropped in early trade, but this reversed after clearing house LCH increased the margin on debt from the euro zone’s third largest economy, increasing the cost of using Italian bonds to raise funds.

Short-dated Italian yields rose 5 bps in the immediate aftermath of the news, hitting the day’s high of 0.62 percent, before settling at 0.60 percent.

That said, Italian 10-year yields were still at 2.46 percent in early trade on Wednesday, wiping out all of the losses since a May 29 selloff.

The closely-watched Italy/Germany 10-year bond yield spread is also close to its tightest since that date at 211 bps.

Analysts said this was mostly to do with a hunt for yield and a persistent carry trade, a term described a trading strategy where some investors borrow money at low rates to invest in assets with a higher yield.

“Nothing changed in the political situation – in the autumn, when the arguments come back and the government begins its work, we could see another situation,” said DZ Bank analyst Sebastian Fellechner.