Morgan Stanley slices outlook for German government bond yields

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After German short-term bond yields struck a record low last week, Morgan Stanley analysts have reduced their year-end target for the country’s sovereign bond yields.

The bank’s rates strategists now predict that the two-year Schatz yield, which moves in the opposite direction of the bond’s price, will end 2017 at minus 0.7 per cent. That represents a 60 basis point cut to Morgan’s outlook at the end of last year.

German debt, seen a European safe haven, has been bid up by investors recently amid angst over elections in France.

The two-year yield ticked higher by 1.3bps on Monday, however, to minus 0.952 per cent as Marine Le Pen’s standing in French election polling eased. Ms Le Pen has promised to pull France, the eurozone’s second biggest economy, out of the currency bloc.

Morgan’s sharp reduction to its Schatz yield forecast is not due to European politics, however, but instead a result of European Central Bank policies.

“The overall narrative for 2017 remains the same as it did in our 2017 outlook: the ECB will look to scale back stimulus gradually over the year,” the investment bank said. “However, the policy mix we received at the December ECB meeting was different from what we had anticipated.”

In particular, Morgan pointed to the ECB’s decision in December to continue its bond-buying programme until the end of 2017.

Looking at the longer end of the curve, Morgan cut its 10-year forecast by 20bps to 0.7 per cent, and the 30-year by 10bps to 1.55 per cent. The 10-year yielded 0.19 per cent on Monday, while the 30-year yield was 0.946 per cent.

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