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 US Treasury yield curve over recent sessions.
Most bond yields in the euro zone were 2-3 basis points higher with the exception of Germany's longest-dated bonds, which stood out as an outperformer.
Germany's 30-year bond yield fell 3 basis points to its lowest level since early September at 1.108 percent .
That pushed the gap over 2-year bond yields briefly to around 182 bps, the lowest since early September before steadying at around 185 bps.
The move follows a flattening in the US Treasury yield curve to its lowest in a decade as investors price in the expectation of higher US interest rates over the short-term, but low inflation over the long term.
The dynamics driving European and US bond markets differ because of the varying degrees of monetary accommodation.
After the European Central Bank extended its asset purchase programme last month, and pledged to keep rates at record lows for some time, analysts said 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.
"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."
Thirty-year German bond yields are down around 5 bps this week, according to Reuters data. In contrast, 2, 5 and 10-year bond yields have all risen marginally.
In the US, 30-year bond yields have also seen sharp falls this month, a move analysts say could also be explained by pension fund demand.
"30-year bonds have done relatively well versus the rest of the curve," said Credit Agricole rates strategist Orlando Green. "There is not too much supply coming up in the euro zone, so there is a yield-hunting dynamic in play."
Germany sold 839 million euros of 30-year bonds on Wednesday, while Italy said it bought back bonds for a total of 5.5 billion euros.
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