German 10-Year Yields Drop Below Zero for First Time Since 2016

(Bloomberg) -- German 10-year bond yields dropped below zero for the first time in more than two years after the nation’s manufacturing sector fell deeper into contraction, compounding fears of an economic slowdown across the euro area.

The securities, seen as some of the safest that investors can buy, have rallied this year as inflation and growth data have disappointed, while the global economic outlook has also worsened. Friday’s move reverberated through to global markets, with the yield on benchmark Treasury notes falling to the lowest in more than a year.

Bund yields last dropped below zero percent in 2016, when the European Central Bank was still pumping money into the economy and the U.K. voted to leave the European Union. The slide below the threshold again, following the conclusion of the ECB’s bond purchases and as the Brexit deadline approaches, has led to increased fears of a so-called Japanification of the region, where inflation, growth and yields remain permanently low.

“The breach of zero underlines how the Fed, BOE and ECB have created a carry environment and a hunt for yields that we haven’t seen for years,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “It’s the crux of current market sentiment.”

The IHS Markit’s Purchasing Managers’ Index for German manufacturing fell to 44.7, the lowest since 2012 and well below economists’ median forecast of 48. The data underlines why market expectations for the ECB’s first interest-rate increase since 2011 have been pushed toward the end of 2020, with the Federal Reserve also having put its rate-hiking cycle on hold.

Germany’s 10-year yield fell four basis points to zero percent, the lowest level since October 2016. Equivalent Treasury yields also dropped four basis points to 2.50 percent after touching 2.49 percent, a level not seen since January last year. The euro slid 0.6 percent to $1.1304, with the common currency’s weakness making European bonds more attractive for foreign investors on a currency-hedged basis.

Demand for German bonds has also been boosted by political risks, from Brexit to Italian instability. EU leaders have staved off the risk of the U.K. crashing out of the bloc without a deal next Friday but only gave U.K. Prime Minister Theresa May an extra two weeks.

The German data was also followed Friday by a contraction in euro-zone manufacturing. Signs of a weaker economy in Europe and the U.S. or Brexit uncertainty may push bund yields further into negative territory, according to Rabobank.

“On top of the signal sent by the PMI manufacturing data, this comes on the back of dovish central banks,” said Antoine Bouvet, an interest-rate strategist at Mizuho International Plc. “The stars did align for this sort of move.”

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, Neil Chatterjee, James Amott

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