German bonds heading below zero

Germany’s benchmark 10-year government borrowing costs are on track to fall below zero for the first time, raising fresh concerns over the damaging side effects of the European Central Bank’s landmark bond-buying programme. Yields on Bunds dropped to just 0.16 per cent on Friday, compared with 0.54 per cent at the start of the year, and as the ECB enters its second month of quantitative easing, many analysts think it could be only a matter of time before German 10-year yields drop below zero. Negative yields in Germany would highlight the shortage of the highest-quality European government debt caused in part by the ECB’s own buying programme. Steven Major, global head of fixed-income research at HSBC, said that negative yields rendered conventional valuation techniques redundant. “They are like commodities such as barrels of oil — there is no coupon and you are taking a bet on their future price. This is not what bond markets are supposed to do . . . the whole thing is crazy.” (paywall) (VIEW LINK)

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