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ECB's commitment to QE squeezes German yields to near zero
[LONDON] German 10-year yields fell to near zero for the first time on Thursday, a day after the European Central Bank affirmed its commitment to see out its trillion euro asset purchases.
Yields on other top-rated 10-year eurozone government bonds also hit record lows. They included French equivalents before an auction of up to 8 billion euros of bonds when Paris is expected to raise five-year money at negative yields.
Usually such huge volumes would push yields higher in secondary markets but concern that the ECB's quantitative easing scheme will hoover up many of the tradeable bonds is subduing yields into the sales.
Although this week sees the biggest gross issuance since May 2014, analysts say net issuance in April is nevertheless likely to be low with the supply offset by about 94 billion euros of redemptions as well as central bank buying.
German 10-year yields, the benchmark for eurozone borrowing costs, fell as low as 0.094 per cent while French equivalents were 1.3 basis points down at 0.343 per cent with five-year yields at -0.004 per cent . Belgian, Austrian, Dutch and Finnish 10-year yields were also at all-time troughs.
France will sell three-, four- and five-year bonds later in the day as well as 1.5-2 billion euro of inflation-linked bonds.
Yields on these bonds in the secondary market are already below zero and France is expected to join euro zone peers Germany, Austria and the Netherlands in selling five-year bonds at negative yields, effectively allowing the countries to make a profit by borrowing.
Investors do not mind the negative yields when purchasing the bonds as long as they can later sell them to the ECB for a better price. Germany moved closer on Wednesday to raising 10-year money for free, showing investors' willingness to compete for bonds with the ECB.
"Demand (at the French auction) will be intact. You know that at the end of the day there will be a buyer," said BNP Paribas's eurozone rates strategist, Patrick Jacq.
"Net supply is usually negative in April in the eurozone and if you add the PSPP (QE) then there's a massive imbalance between demand and supply ... It's not surprising to see yields at current levels, maybe lower tomorrow and next week."
Spanish 10-year yields were a touch higher ahead of a sale in Madrid of up to 5 billion euros of five-, 10- and 14-year bonds.
Greek two-year yields jumped more than 100 basis points to 24.88 per cent after Standard & Poor's downgraded the country and Germany's finance minister said on Wednesday there was little chance of the eurozone reaching a deal with cash-strapped Athens next week.
The Greek government and its creditors have said they need to reach at least an outline agreement on economic reforms at an April 24 meeting of euro zone finance ministers. These reforms are needed to unlock much-needed bailout funds.
Ratings agency S&P cut Greece's credit rating deeper into junk on Wednesday, citing worsening economic conditions due to prolonged negotiations between the country and its lenders.