Amsterdam, November 4
German bond yields touched their lowest level since March on Wednesday and Portuguese yields plumbed record depths as uncertainty around the US election outcome pushed investors to pare back bets on a Democrat-led fiscal stimulus package.
Safe-haven US Treasuries rallied sharply on signs the presidential contest could drag on, with a Democratic Party sweep seen as less likely. This cut the perceived likelihood that a large new stimulus package—which is supportive of risk assets and negative for bonds—would be approved.
The Treasuries rally drove down Germany’s 10-year bond yield, Europe’s safe-haven benchmark asset, to its lowest since the coronavirus market rout in March, at -0.671 per cent in early trade.
But moves were much less pronounced than in the United States and investors stressed that, beyond risk sentiment-driven shifts, they didn’t expect a major impact on European bonds from the election.
Bunds pared back gains in later trade, together with Treasuries, as stocks rose. The 10-year yield was last flat at -0.62 per cent.
Daniel Morris, chief market strategist at BNP Paribas Asset Management, said he expected Bunds to continue trading more stably than Treasuries in the coming days, as European bonds were driven mostly by lockdown restrictions in the region, expected to remain in place for several weeks, and support from the European Central Bank.
The gap between US and German 10-year bond yields tightened to around 144 basis points as US Treasury yields fell more than Germany’s.
The gap has widened in recent months as US and European economic recovery diverged, touching 152 bps on Tuesday, the highest since March.
Riskier European government bonds also benefited from the broader demand for fixed-income assets, although less so than German bonds, with Portugal’s 10-year yield touching a record low at 0.055%.
Italian bond yields slipped 1-2 basis points across the curve. .
Chris Iggo, chief investment officer of core investment at AXA Investment Managers, said Southern European bonds offered an attractive opportunity for investors demanding the safety of fixed-income assets.
“You get (a higher yield) than German bonds, for not quite the same credit risk, but not that much different,” he said, referring to the reduction in credit risk given the support available to countries like Italy from ECB bond-buying and the EU’s 800 billion euro recovery fund.
In the primary market, Germany sold its second-ever green bond at an auction, raising 4.6 billion euros via the five-year bond. — Reuters