Lukanyo Mnyanda and Neal Armstrong Edinburgh and London
GERMANY is on the brink of joining an exclusive club of nations able to borrow for a decade at less than 1 percent. For strategists predicting such a scenario, that is because the European Central Bank (ECB) is not doing enough to prevent a Japanese-style deflationary spiral from taking hold.
Investors are snapping up Europe’s benchmark securities as they judge the ECB’s stimulus measures insufficient to boost an inflation rate that is less than half its target.
Even after the central bank cut its refinancing rate to a record low, introduced a negative deposit rate and unveiled targeted lending in June, market gauges of inflation expectations are falling. A report yesterday showed German investor confidence had declined this month to the lowest level since December 2012.
There’s general disbelief that the ECB’s policies can reflate the euro zone economy and achieve sustainable growth momentum,” Lena Komileva, the chief economist at G Plus Economics in London, said. “The road to a sub-1 percent 10-year bund yield is wide open.”
Benchmark 10-year yields were little changed at 1.06 percent yesterday morning in London after dropping to a record low of 1.023 percent on Friday. The price of the 1.5 percent bund due in May 2024 was 104.045 percent of face value. Two-year notes yielded minus 0.006 percent, the least since May 23 last year.
A negative yield means investors who hold a security until it matures will receive less than they paid to buy it.
Reluctance on the part of ECB officials, led by president Mario Draghi, to adopt full-scale quantitative-easing policies that have been pursued by his counterparts at the US Federal Reserve, Bank of England and Bank of Japan is prompting comparisons with Japan’s stagnation over the past 15 years.
The deflation threat still haunts Japan even though its central bank has been buying about ¥7 trillion (R730 billion) of sovereign bonds a month since April last year.
“In the absence of almost any, let alone vigorous, growth and the ECB voluntarily sticking to (no) plan of zero rates for several years rather than overdue large-scale asset purchases, then yield curve Japanification is set to continue,” Royal Bank of Scotland analysts said yesterday. “Bunds are not expensive at 1 percent if growth momentum is slowing.”
A yield curve is a chart showing rates on bonds of different maturities.
Japan’s 10-year government bond yielded 0.51 percent yesterday. The rate reached an all-time low of 0.315 percent in April last year and has not been above 2 percent since May 2006. The average over the past 15 years is 1.29 percent. That compares with an average rate of 3.55 percent for the German bund.
The ZEW Centre for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to 8.6 this month from 27.1 last month.
Euro zone inflation unexpectedly slowed to 0.4 percent last month, the weakest since October 2009, Eurostat said last month, underscoring the challenge for the ECB as it seeks to rekindle price growth. For the past 10 months inflation has been lower than 1 percent, less than half the ECB’s goal, while joblessness has remained near an all-time high.
Germany’s 10-year break-even rate, a gauge of the consumer-price outlook derived from the yield difference between regular and index-linked bonds, was at 1.19 percentage points yesterday, the lowest since at least 2009.
Germany is scheduled to auction E4bn (R57bn) of 10-year bunds today. The nation last sold the debt on July 16 at a record low average yield of 1.20 percent.
Bloomberg world bond indices show German securities have returned 6.3 percent this year, compared with 11 percent for Spain, 9.8 percent for Italy and 3.9 percent for US treasuries. – Bloomberg