Euro zone bonds rally in August
August 22nd 2019 | Multiple countries | Financial markets and instruments
On August 21st Germany sold a 30‑year bond with a 0% coupon rate and a –0.11% bond yield. This followed a ten‑year bond auction on July 10th with a 0% coupon rate and a yield of –0.26%—the lowest ever recorded for such a maturity. Ten‑year bond yields have been consistently declining in Germany, leaving the whole yield curve in negative territory. Yields in other euro zone economies have also reached record lows over the past week.
Euro zone bond yields have decreased substantially since the beginning of 2019, across both risky and safe economies. The decline was first triggered by high-frequency indicators reflecting weaker economic momentum in late 2018 and became more pronounced throughout 2019.
Although domestic factors play a role in bond market dynamics, the generally downward trend in yields this year has been mostly driven by the increasingly dovish stance of the European Central Bank (ECB). Having adjusted its forward guidance in March, signalling that rates would stay unchanged for longer, the ECB hinted at further stimulus in June. The speech given in late June by Mario Draghi, the bank's president, at the ECB's annual forum in Portugal contributed to the biggest monthly decline in yields since February 2016 in most euro zone economies.
Expectations of subdued growth and inflation in the euro zone have also played a role, especially given weak second‑quarter real GDP outturns. Rising geopolitical uncertainty on the back of US-China trade tensions has also forced investors to look for safer investment options and has increased demand for bonds globally, lifting the total volume of negative-yield bonds to an all-time record of US$16trn.
Negative yields across most euro zone economies are likely to persist until the end of the year. We expect the ECB to announce a substantial easing package at its next meeting in September. Another cut to the deposit rate, currently at –0.4%, will continue to fuel demand for bonds in a series of countries as many nations' bonds still represent a more attractive alternative for banks looking to park their money in a safe and liquid asset. Quantitative easing (QE) is a bond-purchasing programme, and expectations of its restart—likely to start in December—and the programme itself (once it beings) will drive demand for bonds higher, not least as global trade tensions persist.
In our next forecasting round we will revise down our ten‑year bond yield for Germany in 2019, currently at about –0.2%.
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