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German debt – a magnet for investors in times of stress – is still a big draw despite signs of a blossoming eurozone economy.
Two-year German debt yields have hit a new record low today, reaching -0.872 per cent. (Yields fall when prices rise, and negative yields imply a nominal loss for buyers.) This is aided by new rules on bond purchases by the European Central Bank, which help the Bundesbank to keep on buying debt even with yields below the -0.4 per cent deposit rate.
The tightest market focus is on the Franco-German 10-year yield spread, which offers a taste of how nervous investors are about holding politically-charged French debt over the German benchmark.
The yield spread hit 0.82 percentage points on Monday, the widest level since August 2012, but was slightly narrower on Tuesday at 78 basis points.
Markus Allenspach, head of fixed income research at Julius Baer, said:
Politics should continue to drive the bond markets for the weeks to come. Although economic data in the eurozone is widely disregarded by the bond market, it has constantly overwhelmed market expectations since October last year.
We regard the outlook for the eurozone economy as supportive – supportive at least for bank debt that should benefit from lower loan losses and better asset quality.