German Bond Gains Push Yield to 2-Week Low on ECB Buying Outlook

Germany’s government bonds advanced, sending the 10-year Yield to a two-week low, as investors prepared for an increase in debt purchases by the European Central Bank amid low levels of supply next month.

Benchmark German bunds climbed for a third day as European markets prepared to close for an extended weekend. With the ECB set to expand its asset-buying program by 20 billion euros ($22 billion) at the start of April, BNP Paribas SA analysts see net supply in the euro region as negative 123 billion euros next month.

Net negative supply “should drag real yields sharply down,” the analysts led by Laurence Mutkin, London-based head of Group-of-10 rates strategy, wrote in a note. “Germany and France are the most exposed to this development. The 10-year bund yield could fall back close to its lows. We expect the bullish tone to resume next week.”

Germany’s 10-year bund yield fell two basis points, or 0.02 percentage point, to 0.18 percent at 4:35 p.m. London time. It earlier touched 0.16 percent, the lowest since March 10. The 0.5 percent security due in February 2026 rose 0.15, or 1.50 euros per 1,000-euro face amount, to 103.14.

The yield on France’s 10-year bond declined one basis point to 0.53 percent, while that on similar-maturity Italian debt was little changed at 1.30 percent.

While the ECB this month opened up the possibility of buying corporate bonds within its increased purchase target, the inclusion won’t start until later in the second quarter. Anticipation of greater demand for government debt by its largest single buyer is helping to push yields lower, with the average yield on euro-area securities at 0.51 percent as of Wednesday, down from 0.76 percent at the end of last year.

Europe’s bond markets will be closed March 25-28 for the Easter holiday.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editors responsible for this story: David Goodman at dgoodman28@bloomberg.net, Paul Armstrong, Keith Jenkins

By: Lucy Meakin

©2016 Bloomberg News