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Negative euro-area bond yield universe will expand

Wednesday, March 11, 2015

Subject

The euro-area government bonds outlook in the wake of the ECB's QE.

Significance

Strong demand among investors is pushing down yields on both government and corporate debt to unprecedentedly low levels, creating a rapidly expanding universe of negative bond yields. According to Royal Bank of Scotland (RBS), approximately one-third of euro-area government bonds now trade with a negative yield, including more than 50% of German, French, Dutch and Austrian public debt. Of the ECB's 60 billion euros (65 billion dollars) of monthly bond purchases, about 40 billion euros are estimated to involve government bonds, exceeding net government debt issuance across the euro-area. Therefore, yields are likely to fall further in the short term.

Impacts

  • Strong demand for 'safe haven' assets is compressing yields on government and corporate bonds, with negative rates on many securities.
  • About one-third of euro-area sovereign debt is currently trading with a negative yield.
  • The ECB's bond purchases and a relative scarcity in debt issuance will contribute to lower euro-area bond yields further.
  • Persistent fears about growth and inflation will also contribute to lower yields.
  • Negative yields will exacerbate the mispricing of risk, as investors bring forward their expectations regarding the US rates lift-off.
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