London: Germany’s borrowing costs hit their lowest level in months yesterday as investors rushed to buy up one of the safest securities in the world after North Korea fired a ballistic missile over Japan.
North Korea’s ballistic missile test early yesterday prompted warnings for residents to take cover while provoking a sharp reaction from Japanese Prime Minister Shinzo Abe and other leaders.
“We are seeing a classic risk-off pattern after Pyongyang fired the ballistic missile,” said DZ Bank analyst Rene Albrecht, pointing to US Treasuries, German Bonds and gold as examples of safe-haven assets that were in demand yesterday. The yield on Germany’s 10-year government bond , the benchmark for the eurozone region, fell 3 basis points to 0.34 percent, its lowest since June 28.
The yield on short-dated German “Schatz” notes, sank further into negative territory, hitting its lowest level in over four months at minus 0.76 percent.
However, this had the effect of making an auction of two-year bonds less attractive, and the German debt agency fell short of its target of selling ¤5bn of new bonds.
The German Finance Agency, the federal government’s debt management office, sold ¤4.03bn of its new 0.00 percent, Schatz notes at an average yield of minus 0.74 percent, the Bundesbank said yesterday.
In keeping with the jittery mood, riskier assets underperformed yesterday.The gap between lower-rated Southern European government bond yields and their better-rated counterparts increased, and Italy’s 10-year bond yield spread over Germany widened 6 basis points to 177.5 bps, the widest since mid-July.
“In times of higher political tensions, there is more demand for Bonds than for peripheral bonds,” said Albrecht of DZ Bank. A stronger euro also put downward pressure on euro zone government bond yields
The single currency hit $1.20 for the first time since January 2015 yesterday, adding to an expectation that reduced import prices may keep inflation low and delay the European Central Bank’s withdrawal of stimulus.
“Euro strength is putting resilient inflation expectations to the test and likely signs for slipping HICP core inflation over the coming days should further weigh on break-evens,” Commerzbank analysts said in a note.
A gauge of long-term inflation expectations in the euro zone, the five-year forward rate, has been trading at around 1.59 percent, well below the ECB’s target for less than 2 percent.
