LONDON: Investors were left despairing this week after 10-year German Bund yields, the benchmark instrument for European fixed-income markets, went negative for the very first time as the tightening of core European government bonds shows no signs of relenting.
Concerns over a potential British exit from the European Union were blamed, but analysts said it could become a more long-lasting phenomenon, driven by expansive monetary policy. The 0.50pc February 2026 Bund breached the 0pc level early on Tuesday and went on to hit a low of -0.037pc, according to Tradeweb data, though it was marginally positive again by Friday midday.
"Ten-year German Bund yields are the measure of all things in finance," said Stefan Kreuzkamp, chief investment office at Deutsche Asset Management, the asset management division of German lender Deutsche Bank.
"A minus in front of the interest rate is a symbolic manifestation of a world turning upside down. The evaporation of this reference distorts every single asset class."
Several analysts expect the 10-year Bund to go further into negative-yielding territory in the future. Citigroup analysts reiterated their view that it will hit -0.15pc, suggesting this could come sooner than expected given it has already gone into negative territory.
Rabobank analysts believe the 10-year will end the year at -0.10pc, with the 30-year at 0.50pc.
NO ALTERNATIVE
The news is symptomatic of a wider issue in fixed-income markets across Europe: the low returns on offer for the investment community. And yet, no one is able to leave for lack of reasonable alternatives.
"Institutional investors are in the vices of low interest rates and have to choose between unsavoury alternatives," said Raimund Heischmann, a portfolio manager at German asset manager MEAG.
"You can find positively yielding assets, but often at a much higher credit risk, higher capital requirements and lower liquidity." More than 30% of government bonds in developed markets are currently yielding in negative territory as a direct consequence of expansive monetary policy, he said.
"If you had told me 12 months ago, deposit rates will be at -40, Bunds would be at these levels, I would have predicted some outflows for most of the fixed-income funds," said Tanguy Le Saout, head of European fixed income at Pioneer Investments.
But that hasn't happened, he said. Pioneer set up a subordinated bond fund in December last year to invest in corporate hybrid, bank Tier 1 bonds and US preferred shares, and this fund has grown to 700m in six months. Other investors would have moved from a fixed-income to a multi-asset portfolio, he said.
ISSUER OPPORTUNITY
While investors are looking at their options, there are no signs that SSA issuers should be concerned about demand diminishing, bankers who cover the sector said.
"The whole North European real-money investor community is having a terrible time of it, and its choices are limited.
They essentially can either go up the duration curve or down the ratings spectrum," said one DCM banker covering SSA.
"This could be an opportunity for borrowers to issue some duration at attractive rates. Certainly, so far, it is not a challenge for issuers at all," he said.
This was best typified by a recent deal by KfW. The Germany agency received more than 6.75bn of demand for the first ever five-year negative yielding SSA benchmark.
The Germany-guaranteed agency ended up printing a 5bn 0pc June 2021 bond at a final yield of -0.196%. "Given that so many German Bunds are trading below the deposit rate, this was something of a bargain," one SSA syndicate official said at the time.
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