LONDON: German two- and five-year government bond yields hit new lows on Wednesday after a report that European Central Bank officials are considering options to stagger charges on banks hoarding cash or to buy more debt ahead of next week's ECB meeting.
The central bank is widely expected to cut its deposit rate on Dec. 3 and possibly expand its asset-purchase programme to lift inflation and growth in the euro area.
ECB officials are considering options such as introducing a two-tier penalty charge on banks that park money with the ECB to snapping up the bonds of towns and regions, according to officials who spoke to Reuters.
Officials, who spoke on condition of anonymity, said even buying rebundled loans at risk of non-payment had been discussed in preparatory meetings, although such a radical step is highly unlikely for now.
Two-year German yields fell as low as minus 0.415 percent, while five-year yields dropped as low as minus 0.187 percent. They were down 3-4 basis points on the day.
German bonds with maturities of up to 7 years carried negative yields and those with maturities going up to September 2020 traded below the ECB's current -0.20 percent deposit rate.
Richard McGuire, a senior fixed income analyst at Rabobank in London, said the article was notable on two fronts.
"It alluded to the ECB possibly buying bundles of loans and while this is radical and something that we don't envisage, the fact this is being entertained suggests we could see something aggressive next week," he said.
"The tiering of the deposit rate reflects that the ECB is considering an aggressive deposit rate cut, hence the need to mitigate the impact." German Bund yields were 3 basis points lower at 0.47 percent, having earlier hit their lowest level in almost a month at 0.464 percent.
Yields across the euro zone were down sharply, with Portugal leading the pack after the appointment of Socialist Antonio Costa as prime minister ended a long political impasse and ensured a 10-year bond auction went smoothly. Portuguese yields were down 10 basis points at 2.43 percent.
Euro zone money markets are fully pricing in a cut of at least 10 basis points in the deposit rate to -0.30 percent next month and a further 10 bps cut within a year.
"If the ECB takes action to mitigate against pressures on the banks, they may even cut further," RBC chief European macro strategist Peter Schaffrik said.
The ECB said on Wednesday it will frontload its bond purchases between Nov. 27 and Dec. 21 to offset a suspension of the programme over the holiday period, offering additional support to markets over the coming weeks.
GERMAN AUCTION
Germany sold 2.08 billion euros of 10-year bonds at an auction that saw poor demand.
The country's finance agency said the Bund auction attracted bids worth less than the amount on offer, making the sale technically uncovered.
It was the eleventh uncovered German bond auction this year and the sixth in the 10-year Bund. Such auctions are not uncommon in Germany, where debt sales usually depend on investor interest on that particular day.
"Technically uncovered Bund auctions are now a familiar event and the tone in the market remains bullish," said Rabobank's McGuire.
Italy sold 1 billion euros of inflation-linked bonds maturing in 2023 and 2032 and 1.5 billion euros in zero-coupon bonds. Portugal sold almost 1 billion euros of 10-year bonds.
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