The European Central Bank is closely monitoring distortions in the German bond market, president Mario Draghi has said.
Responding to a question at the ECB’s monthly conference about patterns in the market in the past three weeks, in particular at the shorter-dated end of the market, Mr Draghi said that the central bank had observed them “and we are monitoring them quite closely”.
While inflation has been on the rise in Germany and across the eurozone, German bonds have seen prices rise. A rise in inflation usually sparks a fall in bond prices as it harms investors’ returns.
German inflation hit its highest level in four years in February, but yields on 10-year German Bunds have remained low (yields fall when prices rise) while prices of two-year German debt have hit record highs in recent weeks after the ECB began snapping up negative yielding debt below its -0.4 per cent yield threshold.
Mr Draghi said that the ECB was in a preliminary stage of its analysis of distortions in the German bond market but that it had identified three main causes.
One is that German bonds are viewed as a safe haven, he said. That has triggered flows towards the market in a climate of political uncertainty.
In addition to that, Mr Draghi noted that the short term market was seeing inflows from investors who didn’t have access to the ECB’s deposit facility and saw German short-term debt as an equivalent alternative. “This share of people has gone up and that’s why we have low yields in the cash bond market on the short term but not in the repo market because investors are different,” he noted.
The final cause, Mr Draghi said, was the ECB’s asset purchase programme. He said it was too early to assess the relative weight of the factors, while adding he thought the ECB’s intervention was the least significant of the three.
Mr Draghi indicated that the ECB was likely to have a more definite view on the distortions by the time of the next press conference.