Markets

German five-year bond yields turn positive for first time since 2015

Call for end of ECB bond-buying and US treasury weakness boost euro zone yields

A financial trader monitors data on computer screens as a desktop television shows euro currency banknotes at the Frankfurt Stock Exchange in Frankfurt, Germany. German five-year yields turned positive for the first time since 2015 on calls for an end to the ECB’s bond-buying programme which is designed to support the euro zone economy. Photographer: Martin Leissl/Bloomberg

Dhara Ranasinghe
Mon Jan 29 2018 - 12:53

Five-year German bond yields turned positive for the first time since late 2015 on Monday and yields across the euro area hit fresh highs after a European Central Bank policymaker said the ECB should make clear it would end its bond purchases this year.

Dutch central bank chief Klaas Knot said on Sunday the ECB should make clear that it will end its asset purchases after the current bond buying programme ends in September, adding: "There is no reason whatsoever to continue the programme."

The comments, together with a sell-off in US treasuries, cemented a bearish tone in bond markets, which have been hit in recent weeks by growing expectations that major central banks are moving closer to unwinding the extraordinary stimulus that has underpinned low borrowing costs for so long.

In Germany, the euro zone’s biggest economy, five-year borrowing costs rose to a high of 0.013 per cent, turning positive for the first time in more than three years. They were last trading at 0.002 per cent.

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Germany’s 10-year bond yield rose to its highest in more than two-years at 0.625 per cent, while two-year bond yields hit their highest since mid-2016 at minus 0.51 per cent.

Across the euro zone, 10-year bond yields were up between two and five basis points on the day, with French and Dutch yields climbing to multi-month highs.

"The Knot comments are a factor behind the sell-off in bonds today," said DZ Bank rates strategist Andy Cossor. "There's also the sell-off in US treasuries."

The 10-year treasury yield rose to 2.724 per cent , its highest level since early 2014, while two-year treasury yields rose to 2.161 per cent – their highest since 2008.

Comments from the Bank of Japan governor on Friday that inflation is finally close to reaching its target added to a sense of a turnaround in policy among major central banks.

The ECB meanwhile surprised markets by striking a modestly dovish tone last week in the face of a robust euro, leaving German bond yields with a sixth straight week of weekly rises on Friday.

"We are hitting psychological levels at the moment – five-year German bond yields are above zero per cent and two-year bonds yields are at -50 bps," said Orlando Green, European fixed income strategist at Credit Agricole. "It's difficult to get in the way of the momentum at the moment." – Reuters

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