“People who succeed have momentum. The more they succeed, the more they want to succeed, and the more they find a way to succeed. Similarly, when someone is failing, the tendency is to get on a downward spiral that can even become a self-fulfilling prophecy.”
German Bonds Hit Record High Due To Weak Economic Data In Europe – Rates at 1% – Could This Mean Continued Low Interest Rates For U.S. Into 2015?
Nerves over Russia and a shrinking German economy are making steady, super-reliable German government bonds a red-hot investment.
Bond yields fall when prices rise. In Germany’s case, yields have crashed. The yield on the country’s 10-year benchmark bond has almost halved this year, dipping below 1% for the first time in history on Thursday, showing that these bonds are more in demand than they were even in the depths of the euro-zone debt crisis. Only Japan, famous for its wafer-thin yields, offers more meager returns on long-dated government debt.
Even with returns at such slender levels, most investors aren’t balking, and some expect Bunds’ persistent rise to keep boosting other bonds in their wake.
“Bunds feel like something of a dark star at the center of the fixed-income universe. We’ll see them exerting a gravitational pull on other yields and credit spreads as investors look for yield elsewhere,” said Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, which manages $66.6 billion.
“We’re in a situation where you have ultralow interest rates as far as the eye can see,” Mr. Dowding said, adding that BlueBay favors Bunds in its portfolios relative to U.S. and U.K. debt, due to the brighter economic prospects in those countries that may prompt their central banks to raise rates soon.
Driving the long-running rally further, Thursday’s data showed Germany’s economy, the biggest in the euro area, contracted by 0.2% in the second quarter of this year, capping a wave of disappointing economic data that has swept over the currency bloc in recent weeks. The slowdown piles further pressure on the European Central Bank–which unveiled a package of easing measures in June–to hold interest rates at record lows for years to come and even consider more radical policies, such as a U.S. Fed-style program of asset purchases known as quantitative easing, all of which would support the Bund further.
Sanctions and tensions with Russia have also scared investors into the safety and liquidity of Bunds and crimped the German economy further.
“Russia and Ukraine have clearly had a major impact on global bonds, and the Bund market is more sensitive to a safe- haven rally than other markets,” said Steve Cohen, head of international fixed income at BlackRock, which manages $4.32 trillion.
This year’s plunge in Bund yields–the 10-year bond yielded 1.9% at the start of the year–has outstripped even a hefty and unexpected rally in U.S. debt. The 10-year U.S. Treasury bond currently yields 2.41%, down from roughly 3%. There is little enthusiasm for such paltry yields from investors, many of whom entered 2014 betting that safe-harbor bonds would falter as global growth picked up. But many retain a preference for German debt, given the likelihood that central banks including the Fed and the Bank of England will soon have to contemplate rate rises as economic growth gathers pace.
BlackRock’s Mr. Cohen said the firm prefers Bunds to Treasurys or U.K. gilts.
That view is shared by fellow fixed income giant Pimco, which said the gap between Bunds and the rest can grow.
“With data like [Thursday’s GDP numbers], euro-zone bond yields can decouple from the U.S. and U.K.,” said Andrew Bosomworth, the firm’s head of portfolio management in Germany.
With U.S. interest rates expected to rise in 2015 or 2016 as the ECB stays on hold, “being in German debt isn’t such a bad thing,” said Erik Weisman, global bond portfolio manager at MFS Investment Management, which has $429.7 billion under management. Mr. Weisman prefers euro-zone debt to Treasurys. In the first half of 2014, MFS focused on bonds issued by former crisis spots like Italy and Spain, but as those countries’ yields have fallen it has increasingly shifted into German debt.
“In absolute terms yield levels everywhere are unfathomable,” he said.
For some investors, German yields are simply too low. But few are expecting a sharp rise soon.
“I won’t be buying Bunds at 1%–not because I don’t think yields could go a bit lower. But even if you think they will I believe you’re better off buying the Netherlands, Belgium, Spain or Italy [for the higher yields they offer],” said Marie-Anne Allier, head of euro aggregate bond management at Amundi, which manages EUR800 billion of assets.
The gap in debt yields between these euro-zone countries and Germany can narrow further despite the setback in euro- zone GDP, according to Ms. Allier. Growth rates in the currency bloc remain strong enough to prevent a reprise of the euro-zone debt crisis, but sufficiently weak to cement the ECB’s supportive stance.
“Everybody was expecting a slowdown in the second quarter, and it’s been a little bit worse than expected. But it’s still consistent with growth of just over 1% in the euro zone for the year as a whole,” she said.
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