Behold the inflation-proof German Bund

Listen to this article

00:00
00:00

German inflation hit a four-year high last month but you’d never know it from looking at the country’s bond market.

An annual inflation surge from 1.9 per cent to 2.2 per cent in Europe’s largest economy last month is reviving the worst fears of German tabloids and savers, but investors are taking it all in their stride.

The yield on Germany’s 10-year Bund, which moves in the opposite direction of its price, has barely flinched at the latest batch of inflation data, which also shows average eurozone inflation hitting 2 per cent for the first time since January 2013.

In theory, higher inflation is bad news for bondholders as it eats into investors’ returns. But demand for German debt, considered the eurozone’s safest asset, has been boosted in a major year of elections for the eurozone, helping the Bunds shake off the rise in consumer prices.

As it stands, the 10-year Bund is yielding around 0.3 per cent, climbing above the record low of -0.2 per cent touched in July, but still well within its recent trading range and below the 0.5 per cent it hit in January.

Weak levels of core eurozone inflation, which was unchanged at just 0.9 per cent last month, should also help support bond prices with most economists arguing that the energy-driven price rises will begin to dissipate in the coming months.

German debt is likely to remain an attractive proposition for investors, with the European Central Bank expected to maintain its record low interest rates until at least 2018 and keeping the faith with its stimulus programme until at least the end of this year. The ECB’s oversized presence on the eurozone bond markets has driven yields to lows across the bloc.

Prices of two-year German debt, known as Bundesschatzanweisungen*, or just “Schatz” to its friends – have also been driven to record highs as the ECB has begun snapping up negative yielding debt below its -0.4 per cent yield threshold. The Schatz yield hit an all-time low of 0.96 per cent last week.

*Thanks for this piece of trivia goes to Goldman Sachs.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't copy articles from FT.com and redistribute by email or post to the web.