LONDON Dec 16 Two-year German government bond
yields dropped to fresh record lows on Friday as banks loaded up
on bonds likely to become scarcer after recent tweaks to the
European Central Bank's asset purchase programme.
On a day when most high-rated euro zone government bond
yields were down 3-5 basis points, the yield on the German
two-year government bond, or "Schatz", hit the minus 0.80
percent level for the first time.
Earlier this month, the ECB said it would reconfigure its
bond-buying scheme at the start of 2017, introducing changes
that suggested it would focus its purchases on short-dated
It expanded the eligibility of the scheme to include bonds
with maturities of one year and above and bonds yielding less
than the deposit rate.
Investors had already faced a shortage of short-dated bonds
- which are used as collateral to borrow in money markets -
before the changes, but these are expected to intensify.
"The ECB has come up with measures to reduce scarcity, but
it's not going to make a sea change," said ING strategist Martin
van Vliet, referring to the ECB's move to make a securities
lending programme easier to access.
On Thursday, banks rushed to make use of this programme to
borrow German government bonds from the Bundesbank, market
sources told Reuters.
"The fee is still very punitive for securities lending.
Going into next year I would expect the Schatz yield to go up a
bit - but it will remain at very low levels," he added.
Mizuho strategists said the struggle to find collateral for
repo markets would also narrow the spread between various
two-year euro zone government bonds.
"This is most likely to be true for France, as its repo rate
is the most likely to hit minus 0.70 percent in the coming
months," the strategists said in a note.
French two-year bonds yielded minus 0.66 percent, down 3 bps
on the day. The 14 bps spread over German equivalents is
narrower than the 10-year spread, which stood at 44 bps.
While high-rated euro zone government bond yields, the bonds
of the lower-rated southern European countries were up 1-2 bps
on the day.
Greece's 10-year yield fell 5 bps to 7.53 percent, having
risen over 60 bps in the two previous sessions.
The sell-off in Greek debt this week came as official
creditors suspended a bailout deal after Prime Minister Alexis
Tsipras unexpectedly said he would grant low-income pensioners a
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Abhinav Ramnarayan; Editing by Tom Heneghan)