July 18, 2018 / 3:20 PM / 2 months ago

ECB bets, growth worries boost long-dated German debt

LONDON (Reuters) - The premium investors demand to hold long-dated German bonds over the country’s benchmark 10-year debt was at its lowest level in over five weeks, pushed down by bets on ECB action and concerns over long-term economic growth in Europe and beyond.

FILE PHOTO: The headquarters of the European Central Bank (ECB) and the Frankfurt skyline with its financial district are photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach/File Photo

The gap between the 10- and 30-year bond yields was at 67 basis points, though the narrowing was exaggerated by a recent change in the 10-year benchmark from the February 2028 to the August 2028 Bund. DE10YT=RR DE30YT=RR

Yields on the long-dated debt were also pushed down as investors turned up in numbers for an auction of 30-year bonds by the German debt agency, with demand well exceeding the targeted sale amount of 1 billion euros.

Late last month, sources told Reuters the European Central Bank was considering using redemptions from its bond holdings to buy longer-dated government debt even after its quantitative easing scheme closes at the end of 2018.

“Over the past few weeks, ECB policy expectations have been a bullish driver for euro area bonds in general and also for the German Bund yield curve,” said Commerzbank rates strategist Rainer Guntermann.

“Also there is a bit of uncertainty over global growth which is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt,” he added.

Longer-dated bonds benefit from this hunt for yield, as does lower-rated government debt such as that of France and Belgium and also “peripheral” southern European countries, he said.

With German 10-year yields remaining persistently low — they were at 0.34 percent on Wednesday, less than half this year’s peak of about 0.81 percent — other euro zone debt has benefited.

French and Belgian 10-year bond yield spreads over the German 10-year bond are at their lowest since late May at 28-29 bps. FR10YT=RR BE10YT=RR DE10YT=RR

Most high-grade euro zone bond yields were about a basis point lower across the board.

MARGIN WARNING

Italian yields fell briefly in early trade before reversing after clearing house LCH increased the margin on debt from the euro zone’s third largest economy, increasing the cost of using Italian bonds to raise funds.

Short-dated Italian yields rose 5 bps in the immediate aftermath of the news, hitting the day’s high of 0.62 percent, before settling at 0.59 percent. IT2YT=RR

Italian 10-year yields IT10YT=RR were up 2.5 bps in late trade at 2.51 percent.

Analysts said Italian yields have been pushed down in recent days by the hunt for yield and carry trades, a trading strategy where some investors borrow money at low rates to invest in assets with a higher yield.

Reporting by Abhinav Ramnarayan; Editing by Toby Chopra and David Stamp

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