ECB scarcity headache a virtuous cycle for bondholders

Bloomberg

A potential headache for the European Central Bank is turning out to be a boon for holders of Germany’s negative-yielding bonds.
For ECB officials looking for ways to avert a potential shortage of securities to acquire for their asset-purchase program, the publication of Germany’s draft budget Wednesday showing an almost 11 percent drop in planned borrowing wouldn’t have made for happy reading. That scarcity has been one of the reasons supporting bond prices and pushing yields to all-time lows.
Europe’s sovereign securities rose on Thursday, tracking gains made by Treasuries a day earlier, as minutes of the Federal Reserve’s July policy meeting fueled wagers that U.S. interest rates will stay lower for longer.
Germany’s budget “is clearly another sign that the ECB will have to address that issue” of bond scarcity, said Antoine Bouvet, a London-based rates strategist at Mizuho International Plc. “Most of the potential solutions are supportive for European government bonds.”
Benchmark German 10-year bund yields fell two basis points, or 0.02 percentage point, to minus 0.066 percent as of 9:39 a.m. London time. The zero percent security due in August 2026 rose 0.16, or 1.60 euros per 1,000-euro ($1,132) face amount, to 100.663. The yield dropped to a record-low minus 0.205 percent on July 6.

Italy, Spain
Italy’s 10-year bond yield dropped one basis point to 1.10 percent, while Spain’s declined one basis point to 0.96 percent. Treasury 10-year note yields were little changed at 1.55 percent, after falling three basis points on Wednesday.
About 65 percent of Germany’s $1.1 trillion of debt yield less than the central bank’s deposit rate of minus 0.4 percent, making them ineligible for the quantitative-easing program that’s planned to run until at least March 2017.
For investors, the shortage of bonds has been good news so far, boosting the prices of Spain’s and Italy’s government securities even as those countries struggle with political and banking instability. An account due later Thursday of the ECB’s July policy meeting may offer clues on how officials plan to tweak the QE program to improve their ability to source bonds. Some analysts speculated that changes would favor the region’s higher-yielding securities.
German sovereign securities handed investors a return of 6.3 percent this year, according to Bloomberg World Bond Indexes. Spanish government debt earned 6.6 percent, while Italian bonds gained 4.6 percent.