StanChart: Opportunities in China High-Yield USD Bonds
Benchmark German debt yields turned positive for the first time since before the pandemic as markets braced for the removal of central bank support.
The rate on 10-year bonds rose four basis points to 0.02 per cent, crossing above zero for the first time since May 2019. A global bond selloff has taken its toll even on German debt -- famed for ultra-low rates -- as traders weigh the prospect of tighter
European Central Bank policy. Money markets now see a 10-basis- point rate increase to minus 0.4 per cent in September from October previously, and are betting borrowing costs will turn positive by the end of next year.
“Investors are very cautious that this year the ECB is less accommodative,” said Althea Spinozzi, fixed income strategist at Saxo Bank A/S on Bloomberg Television on Wednesday.
“At that point, Bund yields will need to rise well above that zero per cent mark and that is trouble for other European sovereigns, especially those with a high beta such as Italy.”
The surge in German yields mirrors a global move led by Treasuries. As speculation grows that the U.S. Federal Reserve will respond to rampant inflation by delivering a half-percentage point increase in March, which would be its first since 2000, futures traders are ramping up bets on further bond declines.
For European investors, German yields’ milestone is symbolic given sub-zero yields have been a reality for several years. The 10-year rate has been submerged in negative territory since early 2019, and reached as low as -0.91 per cent around the height of coronavirus panic in March 2020.
The sum of negative-yielding German bonds fell below 1.5 trillion euros (US$1.7 trillion) for the first time in two years on Monday, while the global total is now half its 2020 peak after sliding to 9.12 trillion dollars.
“Positive yields are here to stay,” said Antoine Bouvet, a rates strategist at ING Groep NV, adding “it’s a brand newworld.”
--With assistance from Libby Cherry.