Risk of debt shortage seen shaking German bonds out of slumber

London

GERMAN bonds look set to face a more volatile end to the year after seeing the narrowest quarterly trading range ever.

An increasing shortage of bunds amid slowing government debt sales and continued purchases by the European Central Bank could push benchmark yields below recent ranges in the fourth quarter, according to Citigroup. Strategists at the bank see the German 10-year yield falling to minus 0.6 per cent, compared with the third-quarter average of minus 0.47 per cent.

Uncertainty over the November US election and a resurgence of the coronavirus should spur haven buying of bunds, adding downward pressure on yields, according to Citi.

Strategists Jamie Searle and Aman Bansal estimate that monthly debt issuance this quarter by the German finance agency will average 10 billion euros (S$16 billion), about 60 per cent less versus the April-September period. That, coupled with central-bank buying under its pandemic debt-purchase programme, is likely to leave investors scrambling to get hold of the euro area's safest asset.

The ECB may extend its asset-buying programme next year, while Germany's self-imposed borrowing limits should be back in place by 2022 after a temporary relaxation due to the coronavirus pandemic - and that suggests "bund shortages look set to persist for years," the Citi analysts wrote in a note.

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Bunds have remained supported in recent months by monetary easing in response to the pandemic's economic impact, while gains have been capped without the immediate prospect of more interest-rate cuts. That narrowed last quarter's trading range to the least on record. BLOOMBERG