German and Portuguese bond yields drop to fresh lows in anticipation of ECB QE
German and Portuguese borrowing costs slipped to new record lows Thursday as investors flocked to the European sovereign bond market in anticipation of the European Central Bank’s monthly bond-buying splurge.
Germany's 10-year yields slipped to a new record low of just 0.29% while Portugal's benchmark borrowing costs dropped below 2% for the first time. Earlier this week, Ireland's 10-year paper breached 1%.
The new lows in European government bonds come after the strong demand at the German auction of five-year notes on February 25, which saw the bid-to-cover ratio jump to 2.1, from 1.1 previously, despite the negative yields of -0.08% on offer. The auction was the first time the country sold five-year bonds with a negative yield.
The falls in benchmark European borrowing costs are a reflection of investors allocating funds into sovereign and peripheral bonds in anticipation of the ECB’s €60bn per month bond-buying programme next month. The inverse relationship between bonds and yields mean that increased investor demand for government bonds props up the price of the asset, in turn, reducing the cost of borrowing, or yield.
The improving economic fundamentals of Germany have been sending the country’s bonds higher and Bund yields south since the peak of Eurozone debt crisis as investors flock to the country's fixed income market due to its safe-haven status.
Though not considered safe-havens, demand for peripheral bonds has increased on the back of a reduction in credit-risk fears as southern Eurozone growth fundamentals continue to improve and concerns over a "Grexit" recede following the recent deal between Greece’s new government and euro area policy-makers.
Arguably though, the biggest driver yield suppression is the ECB’s latest stimulus plan. “With Greece seemingly off the market’s radar (at least for the time being), the focus is on the imminent ECB QE, which should be supportive of peripheral spreads in general,” said Giuseppe Maraffino, fixed income strategist at Barclays.
In the peripheral space this week, the stand-out gainer has been Italy with its 5-year and 10-year bonds outperforming German Bunds by around 23 basis points in both sectors as well as outperforming Spanish 5-year and 10-year bonds by around 5 basis points and 4 basis points, respectively.
Acting as a backdrop, upbeat economic data on Thursday out of the Eurozone lifted market sentiment further. Germany’s labour market data showed the number of people without jobs fell by 20,000 in February on a seasonally-adjusted basis – beating economist forecasts of 10,000.
Meanwhile, confidence in the Eurozone is on the rise after data from the European Commission showed the Economic Sentiment Indicator rose to 102.1 in February from a revised 101.4 the month before.