LONDON: German 10-year yields hit their lowest level in a year on Monday with analysts pointing to a wave of bond redemption and coupon payments pinning borrowing costs near record lows.
At 55 billion euros, the amount of cash flowing back to investors this week is five times that of the debt scheduled to be sold via new bonds, bolstering demand in secondary markets that is already supported by the European Central Bank's recently upsized quantitative easing scheme.
German bonds, the euro zone's top-rated benchmark, are expected to be the biggest beneficiary of these flows with economic and political risks jarring investor nerves.
Spain, the bloc's fourth largest economy, had one of its credit ratings put on negative outlook on Friday, while wrangling between Greece and its creditors over further financial aid hint at the strains that could come back to haunt markets over the summer months.
Ten-year Bund yields fell nearly 3 basis points in early trading to hit 0.075 percent, before easing back up to 0.11 percent as shares reversed early losses. Analysts said the record low of 0.05 percent remained a target even though there are worries a sell-off, seen after those lows were hit last year and which saw investors rack up double digit losses in a matter of weeks, may be around the corner.
"I'm pretty sure that short-term we might see a test of these lows but bond markets might be somewhat prone to a similar correction to last year," KBC rates strategist Mathias van der Jeugt said.
"Whether that will occur this week or next week, it is hard to tell but it is my gut feeling that we approaching something like that."
The ECB's monthly asset purchases rose by 20 billion euros to 80 billion euros last week and much of that additional buying is expected to be targeted at government bonds in the near term. Plans to include corporate bonds in the scheme take effect later this quarter.
On top of this, April is the most barren month of the year, with debt sales across the euro zone estimated to be worth 123 billion euros less than redemptions and ECB purchases.
In an interview published on Saturday, Fran?ois Villeroy de Galhau became the ECB's latest governing council member to stress that the central bank still has more weapons to fight near-zero inflation in the euro zone.
Four euro zone countries -- the Netherlands, Germany, Italy and Ireland -- are set to sell bonds this week for a total of around 11 billion euros, but this is just a fraction of the redemptions, much of which will need to be re-invested. "Bunds look well supported by the benign cash flow profile and shaky risk sentiment, Commerzbank strategist Benjamin Schroeder said.
Rising political risk in the bloc's periphery is also seen as a support for the safe haven in the months ahead.
Spain and Ireland now both look set for fresh elections in the coming months after inconclusive votes, Portugal's fragile leftist coalition is faltering and Greece is heading for another collision with creditors over debt relief.
Layered on top of these political risks, analysts such as Mizuho's Peter Chatwell fear a knife-edge vote in Britain over its EU membership in June "risk destabilising the monetary union over the couple of weeks at least."
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