FESTIVE CHEER SENDS EUROZONE BOND YIELDS TO FRESH HIGHS / THE FINANCIAL TIMES

Festive cheer sends eurozone bond yields to fresh highs

Signs that Germany is contemplating higher borrowing have added to selling pressure

Tommy Stubbington



Bond yields in key European markets start 2020 at their highest levels since the summer, after an outbreak of optimism about the global economy sparked a heavy sell-off at the end of the year.

Germany’s 10-year government bond yield, which serves as a benchmark for the eurozone, climbed sharply in recent days to end the year at minus 0.19 per cent, up from minus 0.36 per cent at the start of December.

Yields move inversely to price.Last year, investors piled into the safest government bonds, betting that a global recession was imminent, pushing yields on more than $17tn of debt around the world below zero by the end of August.

Since then, an improvement in economic data has made fund managers increasingly uncomfortable about buying bonds that guarantee a loss if they are held to maturity.

The eurozone — and particularly German Bunds — bore the brunt of the late-year selling thanks to the region’s deeply negative yields.

“Investors are sniffing a global growth recovery and they are selling the most vulnerable asset in that scenario — Bunds,” said Luca Paolini, chief strategist at Pictet Asset Management.

Mr Paolini added that signs that Berlin is contemplating higher borrowing in a bid to stimulate a flagging economy has added to the selling pressure.

“The German government appears keen to loosen the public purse,” he said.Yields across the euro area have followed Germany’s higher. France’s 10-year yield is at 0.12 per cent, the highest since June.

Italy’s 10-year borrowing costs hit a five-month high of 1.41 per cent.

Following the sell-off, which has also pushed bond yields higher in the US and Japan, the global pool of negative-yielding debt has shrunk to $11.2tn.

Some traders and investors say that thinly traded markets during the Christmas period have exaggerated moves in prices. Many are betting that the drivers of low yields — mainly sluggish growth and dovish central banks — will reassert themselves when trading resumes in the new year.

The European Central Bank continues to buy €20bn of bonds a month under its “quantitative easing” programme, for example.

That is enough to hoover up all the expected net issuance of debt across the eurozone this year.

Eurozone governments are set to issue less debt this year than they did in 2019, thanks to a decline in the value of maturing bonds that need to be refinanced, according to Jan von Gerich, Helsinki-based chief strategist at Nordea.

Luis Alvarado, investment strategy analyst at Wells Fargo Investment Institute in San Francisco, said: “Low rates, strong demand for perceived ‘safe-haven’ investments, and the quest for yield will remain as key return drivers for fixed-income markets in 2020.”