LONDON: Investors betting German bond yields will rise next year could be caught out if European Central Bank quantitative easing and scant supply trigger a fresh wave of demand.
Analysts polled by Reuters this week predicted German 10-year yields will rise nearly 50 basis points from current record low levels to 1.15 percent by the end of 2015.
That reflects expectations ECB money-printing will succeed in lifting euro zone inflation from near-zero levels and that a rise in US interest rates will push up Treasury bond yields and exert similar pressure on Bunds.
But such forecasts have proved unreliable in recent years, and some analysts say that even if inflation rises, the ECB's purchases of German bonds will peg back yields.
A similar poll last December forecast a rise in 10-year German yields to 2.3 percent by the end of 2014. On Friday, they stood at a record low 0.657 percent.
"There is a massive demand factor that would counter a strong surge in inflation expectations," said Christian Lenk, a strategist at DZ Bank, which foresees German yields of 0.80 percent in a year's time.
If, as many expect, the ECB buys debt in line with its capital key -- that is, in proportion to the size of each euro zone country's economy relative to the bloc as whole -- the largest share of its purchases would be German.
RBS estimates that under a 500 billion euro scheme, the amount it thinks the ECB will need to buy to expand its balance sheet to the targeted 3 trillion euros, the central bank would purchase 134 billion euros of German bonds. That equates to nearly all the debt Germany plans to issue next year, which analysts estimate will fall by around 18 billion euros to 155 billion euros as the country moves towards a balanced budget in 2015.
It is also more than 10 percent of all Germany's outstanding fixed-rate bonds.
INTERVENTION
If the ECB eases monetary policy aggressively, it may not be the only central bank buying Bunds in large volumes next year.
Any easing would probably weaken the euro, creating a problem for countries including Switzerland, which caps the value of its franc against the single currency and will be eager to stop any appreciation.
"If their resolution is tested, central banks might engage in active FX interventions in order to weaken their currency," said RBS strategist Marco Brancolini, who predicts 10-year German yields will be around 0.45-0.50 percent by end-2015.
"This would be positive for the bond markets, as the bulk of newly acquired euro reserves is likely to be parked into core and semi-core government bonds."
Cyril Regnat, a strategist at Natixis, which forecasts the 10-year Bund yield will be 0.75 percent next December, also thinks some of his peers may be overestimating the impact of central bank buying on investor behaviour.
"The ECB wants investors to switch out of very expensive assets into higher-yielding ones but I don't believe we will see a massive switch from core countries into the periphery," he said, noting continued demand for safe-haven assets. Instead investors will pick up yield by extending duration in their portfolios, swapping five-year German bonds paying almost zero returns for seven- and 10-year debt.
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