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German Bond Yields Hit New Sub-Zero Record; Treasuries Surge

German bonds extended gains, driving benchmark yields to the most negative on record. 

German Bond Yields Hit New Sub-Zero Record; Treasuries Surge
(Source: Bloomberg)

(Bloomberg) -- German bonds extended gains, driving benchmark yields to the most negative on record, while U.S. debt rallied as investors sought safety in sovereign debt amid escalating global trade tensions, faltering growth and Italian political risks.

The yield on 30-year U.S. bonds dropped to a level unseen since the election of U.S. President Donald Trump, and German 10-year rates headed for a fourth weekly decline after the U.S. leader vowed to impose tariffs on Mexican goods. German yields fell below the previous low set three years ago when Brexit and European Central Bank stimulus were the main market drivers.

German Bond Yields Hit New Sub-Zero Record; Treasuries Surge

The drop in yields comes at a time when term structures across various markets are becoming inverted, sparking concern about the strength of the global economy. Investors now get a higher yield on three-month U.S. bills than on 10-year debt, while traders in the U.K.’s money markets are betting that the Bank of England may cut rates next year.

Even as this year’s rally in bunds has caused yields to turn negative across most parts of the curve, demand for German debt has remained strong.

“It is entirely plausible that the entire German curve becomes negative-yielding,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc. “One needs to be thinking of where the ECB deposit rate could go to in the next easing cycle, how much quantitative easing the ECB might do -- all of this is fantastically bullish for bonds.”

The yield on Germany’s 10-year notes fell to -0.213%, taking out the previous low of -0.205% set in July 2016, a month after the U.K. voted to leave the EU. Traders in money markets are now pricing a 70% chance of the ECB cutting its deposit rate in the first quarter of next year. The U.S. 10-year rate fell as much as 7 basis points to 2.15%, while the 30-year yield touched 2.59%.

German Bond Yields Hit New Sub-Zero Record; Treasuries Surge

While geopolitical tensions have been the driver behind the latest bond rally in Europe, they come against a backdrop of structurally low inflation and tepid growth. That has raised fears that the region may be going the way of Japan, meaning permanently low bond yields and loose monetary policy. Inflation also continues to undershoot the central bank’s target in the U.S.

Recession Signals

The yield gap between two- and 10-year German bonds, a gauge of expectations for where the euro area economy is going, is currently languishing at the flattest level since 2015, mirroring other global bond markets. The difference between three-month and 10-year Treasuries has inverted, which is often heralded as a signal that the world’s largest economy may be headed for a recession.

Inflation data across Germany once again fell Friday, with gains in the consumer price index slowing to 1.4% year-on-year. Five-year forward five-year inflation swaps fell to 1.29%, close to the lowest level since 2016.

“We’re now in uncharted territory,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “Dips will continue to be bought as long as the global risk scenario unfolds.”

--With assistance from Benjamin Purvis and Elizabeth Stanton.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Elizabeth Stanton

©2019 Bloomberg L.P.