Germany's bond yield curve flattest in more than two months

LONDON: The yield curve in Germany, the euro zone's benchmark government bond issuer, flattened to its lowest level in more than two months on Wednesday, catching up with the pronounced flattening of the U.S. Treasury yield curve over recent sessions.

Most bond yields in the euro zone nudged down, with falls in German yields led by long-dated debt.

Germany's 30-year bond yield fell 3 basis points to its lowest level since early September at 1.11 percent , pushing the gap over 2-year bond yields  to around 182 bps. That gap was also the lowest since early September.

The move follows a flattening in the U.S. Treasury yield curve to its lowest in a decade as investors price in the expectation of higher U.S. interest rates over the short-term, but low inflation over the long term.

The dynamics driving European and U.S. bond markets differ because of the varying degrees of monetary accommodation.

With the European Central Bank extending its asset purchase programme last month, and pledging to keep rates at record lows for some time still, analysts say long-term yields are falling faster as investors hunt for returns.

They add that strong seasonal demand for long-dated debt from pension funds helps explain the sharp fall in 30-year bond yields this week.

Thirty-year German bond yields are down 7 bps and set for their biggest weekly fall since August, according to Reuters data. In contrast, 10-year and 2-year bond yields are down just 1-2 bps each so far this week.

"Just a couple of big flows can have a big impact at the moment and there was some evidence yesterday of some insurers buying long-end paper," said Martin Van Vliet, senior rates strategist at ING.

"So, we've had some real money accounts buying and front-loading of ECB bond-buying before December and these two things are driving a flatter yield curve."

Germany is scheduled to sell 1 billion euros of 30-year bonds later in the session. Analysts said the market had already made way for the supply by cheapening bond prices earlier in the week.

Italy will conduct a bond-buy back on Wednesday, which is expected to provide some support to Italian bonds.