On Wednesday November 18, Germany broke a record selling its two-year government debt at a yield of minus 0.38 per cent. According to analysts, this move reflects the expectation of further monetary easing by the European Central Bank in the next months.
Justin Knight, European rates strategist at UBS stated that “The market is pricing a strong probability that the ECB will cut its deposit rate to minus 0.40 per cent in December. This is pushing down yields, as front-end yields tend to fall basis point for basis point with cuts to the deposit rate.”
On Wednesday, also Portugal sold its one-year and six-month government bonds at negative yields for the first time. Currently, in the Eurozone, two-thirds of the two-year government debt offer yields below zero, with the only exception of Greece and Portugal, whose bonds yield more than 0.1 per cent. The prospects for longer maturities are similarly unrewarding: about half of the Eurozone government debt offering negative yields on five-year bonds.
According to Peter Goves, European interest rates strategist at Citigroup, “the latest yields were a reflection of just how anchored the front-end is due to expectations of monetary policy this year”. He also added that “It’s very hard to make a case that two-year rates will rise significantly in the near and medium term. They are likely to remain supported by the loose ECB policy.”
In fact, in a speech given last week, ECB president Mario Draghi prepared the markets to the possibility of an expansion or an extension of the quantitative easing program in December. The move might come as soon as December 3 and many ECB watchers believe that it will consist in the cut of at least 10 basis points in the deposit rate charged on a portion of lenders reserves held in the Eurosystem central banks. The rate is currently minus 0.2 per cent, a level that the ECB considered as a lower limit up to last year. If this limit is to be exceeded, demand for government debt will rise and prices for government bond will reach even higher levels. As investors are willing to purchase debt at negative yields, we can reasonably deduce that they are pricing a high probability that Draghi will effectively pursue this strategy in an effort to prevent the slowing in global growth and trade from jeopardising the European economy.
Chiara Cauli
Justin Knight, European rates strategist at UBS stated that “The market is pricing a strong probability that the ECB will cut its deposit rate to minus 0.40 per cent in December. This is pushing down yields, as front-end yields tend to fall basis point for basis point with cuts to the deposit rate.”
On Wednesday, also Portugal sold its one-year and six-month government bonds at negative yields for the first time. Currently, in the Eurozone, two-thirds of the two-year government debt offer yields below zero, with the only exception of Greece and Portugal, whose bonds yield more than 0.1 per cent. The prospects for longer maturities are similarly unrewarding: about half of the Eurozone government debt offering negative yields on five-year bonds.
According to Peter Goves, European interest rates strategist at Citigroup, “the latest yields were a reflection of just how anchored the front-end is due to expectations of monetary policy this year”. He also added that “It’s very hard to make a case that two-year rates will rise significantly in the near and medium term. They are likely to remain supported by the loose ECB policy.”
In fact, in a speech given last week, ECB president Mario Draghi prepared the markets to the possibility of an expansion or an extension of the quantitative easing program in December. The move might come as soon as December 3 and many ECB watchers believe that it will consist in the cut of at least 10 basis points in the deposit rate charged on a portion of lenders reserves held in the Eurosystem central banks. The rate is currently minus 0.2 per cent, a level that the ECB considered as a lower limit up to last year. If this limit is to be exceeded, demand for government debt will rise and prices for government bond will reach even higher levels. As investors are willing to purchase debt at negative yields, we can reasonably deduce that they are pricing a high probability that Draghi will effectively pursue this strategy in an effort to prevent the slowing in global growth and trade from jeopardising the European economy.
Chiara Cauli