European bond buyers find negative doesn’t necessarily mean bad

Giving away your money doesn’t mean losing it these days.

Investors who held shorter-dated European debt have managed to eke out a positive return in 2015, according to Bank of America Merrill Lynch indexes. That was even as price increases pushed yields in Germany and Austria below zero.

The persistence of negative yields is a consequence of unprecedented central bank monetary easing that has suppressed borrowing costs across the world, regardless of the prospect of deflation in Europe and Greece running out of money.

“There’s an element of having to hold bonds almost in spite of the yield,” said David Tan, London-based head of rates at JPMorgan Asset Management, which oversees $1.7 trillion. “As long as Greece remains an issue for financial markets, there’s an additional reason to want to hold bunds.”

Euro-area government notes maturing between one and three years earned 0.5 percent this year through Thursday, according to the Merrill Lynch indexes. While that’s dwarfed by a return of 14 percent in maturities of at least 15 years, the price of safety hasn’t been capital losses.

Yield Search

Buying has continued even as some yields lower than the European Central Bank’s minus 0.2 percent deposit rate mean the securities don’t qualify for inclusion in the ECB’s bond- purchase program that started March 9.

Yields on German two-year notes recorded their fifth straight weekly decline, touching record-low of minus 0.285 percent on Thursday. Germany’s eight-year yields dropped below zero. Those on 10-year bunds declined for a second week and touched a low of 0.139 percent.

“One should be careful not to mix up the yield-to-maturity concept with total returns which can be positive even if yields are negative,” said Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt. “Overall, everyone is struggling to get that extra yield and we are seeing investors move across the curve.”

Tan said he holds German securities with maturities between five and seven years, while also searching for higher returns from longer-dated paper and from the euro-area’s more indebted countries on the periphery.

Portuguese Rally

Yields on Portuguese two-year notes dropped to minus 0.004 percent on Thursday. In was only in May 2011 that the country was forced to turn to an international bailout because its borrowing costs had got out of reach.

Rates collapsed across the region as the ECB started a 1.1 trillion-euro ($1.2 trillion) bond-buying program to stoke consumer prices and revive the region’s economy.

The ECB reported purchases of 41.68 billion euros of government debt in March with Germany, at 11.1 billion euros, making up the biggest proportion. Marius Daheim, a senior rates strategist at SEB AB in Frankfurt, said he wouldn’t be surprised to see German 10-year yields heading toward zero.

“If you believe what the ECB is telling us, that this QE program is here to stay and that it will not be quickly tapered or closed, then you have a strong argument that favors a continuation of the downtrend in yields,” said Daheim.


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