Eurozone government bonds with longer maturities surged yesterday as the region’s central banks bought sovereign debt for a second day, pushing yields closer to those on shorter-dated notes.
Euro-system central banks were said to have purchased securities, including German five-year notes with a negative yield, under the European Central Bank’s expanded quantitative- easing plan, according to three people with knowledge of the transactions.
Belgian and Italian securities were also acquired, one of the people said. An ECB spokesman declined to comment.
As the ECB and national members embark on purchases of sovereign debt designed to boost price growth in the region, rates on short-term securities are below zero in seven euro-area nations, meaning a buyer now would get less back than they paid if they held them to maturity.
That’s boosting demand for longer-dated bonds, particularly as the ECB’s rules preclude purchases of debt yielding below its deposit rate of minus 0.2%.
German 30-year yields dropped the most in more than two months and touched an all-time low.
“Nobody wants to fight the flow. We have many investors who are desperately looking for yield. They are simply scaling into those bonds that yield some interesting pick up,” said Felix Herrmann, an analyst at DZ Bank in Frankfurt.
The Bundesbank may struggle to meet its buying quotas given the amount of German debt yielding less than the ECB deposit rate, Societe Generale analysts wrote in a client note. Germany’s seven-year yield dropped below zero for the first time since February 27.
“Without good purchases in the short-dated bonds, where outstandings are big, it is difficult to see how the Bundesbank is going to get its share of the program done,” the analysts, led by Paris-based head of research Patrick Legland, wrote.
Longer-dated bonds are also being favoured after policymakers last week failed to agree on how to share losses from buying bonds with negative yields.
Seventy-eight of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index already have rates below zero.
“For me, as a fund manager, it doesn’t make sense to hold any bonds with a negative yield, so I’m happy to sell,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20bn
Yields on 30-year bonds from Austria to Italy also fell to record lows yesterday.
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