German Sub-Zero Yields Under Pressure From European Bond Supply

(Bloomberg) -- After the quietest trading month in more than two decades kept Germany’s benchmark bond yields entrenched below zero, the return of sellers next week has the potential to disturb the market calm.

Italy is due to sell as much as 7.75 billion euros ($8.7 billion) of bonds on Aug. 30, followed two days later by a French auction of up to 9 billion euros. Together with potential sovereign sales via banks that are still to be confirmed, total supply in the region next week may reach 27 billion euros, according to Commerzbank AG. Germany, which is offering two-year notes on Aug. 31, was the sole bond issuer this week with a sale of five-year debt.

German Sub-Zero Yields Under Pressure From European Bond Supply

“The syndication pipeline will probably start to fill up,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. The 10-year bund yield may “climb into positive territory” next month when issuance picks up, he said.

A lack of supply and policy direction from European Central Bank officials during the summer vacation period have kept bonds trading in tight ranges. A rally, which peaked last month, pushed about two thirds of yields in the $1.1 trillion Bloomberg Germany Sovereign Bond Index below the ECB’s minus 0.4 percent deposit rate, stoking speculation officials will expand quantitative easing to avoid a potential shortage of securities to buy. Bonds yielding less than the deposit rate aren’t eligible for QE. This has also kept yields confined below the zero percent threshold.

Jackson Hole

Benchmark German 10-year bund yields fell four basis points, or 0.04 percentage point, to minus 0.07 percent this week as of the 5 p.m. London-time close on Friday. The zero percent security due in August 2026 rose 0.396, or 3.96 euros per 1,000-euro face amount, to 100.718.

Bunds were little changed on the day after Federal Reserve Chair Janet Yellen told delegates to the Jackson Hole symposium Friday that the case to raise U.S. interest rates is getting stronger.

The 10-year German yield has moved in a 10 basis-point range this month, the smallest since September 1991, data compiled by Bloomberg show.