All-Time Lows

High Bond Demand Offset by Plunging Yields

spain
Spain's parliament is busy trying to fend off Catalan independence.
  • Why it matters

    Why it matters

    The European Central Bank’s bond-buying program is driving down yields across Europe.

  • Facts

    Facts

    • Yields on 10-year Spanish and Italian bonds have reached historic lows.
    • Analysts say the situation doesn’t adequately reflect the risks, however.
    • The ECB is operating a monthly €80-billion ($89-billion) bond-buying program.
  • Audio

    Audio

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Like the stock markets, the bond markets have also apparently forgotten about Brexit worries for the time being.

Concerns that followed the June 23 vote by the British to withdraw from the European Union  seem to have disappeared. On the contrary, bonds are in great demand once again, including those from the southern euro-zone countries.

In return for the resulting rise in prices, yields on 10-year Spanish and Italian bonds have reached historic lows. The yield on the 10-year Spanish government bond fell below the 1-percent mark on Tuesday, to 0.95 percent, while that of the comparable Italian government bond slipped to 1.07 percent.

This lack of concern among investors is also reflected in yield markups on German government bonds. After the Brexit vote, the risk premiums jumped to above 1.6 percent, the highest level since the fall of 2015. Meanwhile, risk premiums have fallen to only about 1 percent.

The fact that investors continue to snap up Spanish and Italian bonds has much to do with the European Central Bank and its monthly €80-billion bond-buying program.

This is despite the fact that the political and economic situation in Spain and Italy is anything but calm. In Spain, a government has yet to be formed since general elections in late June, thanks to deep divisions between the parties. Meanwhile, Catalan separatists continue to push for independence.

This is why Christian Lenk, an analyst with DZ Bank, believes that the yield markups “only inadequately” reflect the actual risks.

There is a similar situation in Italy, where it is the banking crisis that ought to have investors worried. Furthermore, “in contrast to the euro zone, the economy in Italy has not yet recovered from the shocks of the financial crisis and the euro crisis,” said Patrick Krizan, an analyst with Raiffeisen Bank International.

The fact that investors continue to snap up Spanish and Italian bonds has much to do with the European Central Bank and its monthly €80-billion ($89-billion) bond-buying program. The Bank of England’s bond purchases are also driving down yields in Britain.

“One shouldn’t fight back against the central banks at this point,” said a strategist with Dutch bank ING.

German government bonds are also benefiting from the ECB’s bond purchases. Yesterday Germany increased its 10-year bond by €5 billion, with a historical low yield of minus 0.09 percent, and received just under €5.7 billion in buying orders for the bonds.

After the Brexit, the yield on the market even went as low as negative 0.17 percent.

 

Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. To contact the author: cuennen@handelsblatt.com

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