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Has ‘Japanification’ hit German bunds?

The yield on Japan's benchmark bond rose above its German equivalent for the first time ever Tuesday, sparking investor fears that Europe was shuffling down the Japanese path of slow growth and deflation.

German benchmark 10-year bunds yielded 0.34 percent on Tuesday—above Friday's record-low of 30 basis points—while Japanese 10-year notes (JGBs) yielded 0.36 percent.

The swap-over between German and Japanese debt is a symbolic one. The bund has long been seen as a safe haven and the fall below the JGB's yield—even though it was due to the poorly subscribed auction—is seen by investors as an indication that Europe is heading for a period of "Japanification," or low growth.

The bund has been on a downward trend since the start of 2014, but the catalyst to the about-turn on Tuesday was an unsuccessful bond auction by the Japanese Ministry of Finance.

JGB yields rose sharply after an auction of 2.4 trillion yen ($20.4 billion) of 10-year notes met with little investor interest.

"While central banks may readily engineer negative nominal yields on short-dated government bonds, which are not the natural investment home for long-term savings, it will not be at all easy for them to push longer-dated bond yields through the zero barrier. This is the message from today's Japanese ten-year JGB auction, where a nominal yield below 0.30 percent proved too low to attract more than ragged investor demand," said Stephen Lewis, chief economist, at ADM Investor services, in a research note on Tuesday.

His colleague, Marc Ostwald, described the auction more pithily as "disastrous."

‘Flight to quality’

Eric Vanraes, portfolio manager at EI Sturdza Investment Funds, said that low bond yields around the world, combined with the investor bid for "safe-haven" assets was sustaining the fall in Bund yields.

"Yields are at zero almost all over the world, sometimes negative and that is a flight to quality, a flight to low yield," he told CNBC on Tuesday.

He added: "A lot of investors are obliged to buy bonds, because you have regulations, and maybe, for example, Dutch pension funds, are obliged to buy bonds… and keep in mind that the QE (quantitative easing) in Japan is huge and the Japanese central bank is obliged to buy European bonds, because they have to buy many bonds around the world."


And it is not just the yields on sovereign debt that are heading southward. On Tuesday, the yields on Nestle's 2016 euro-denominated bond fell into negative territory. Reuters showed the ask yield at -0.034 percent. This would possibly mark the first time that a corporate bond maturing in more than a year had a negative yield.

By comparison, benchmark 10-year U.S. Treasury notes remained at a near 21-year-low of 1.72 percent, having broken below the key 1.7 percent mark on Friday.

UK 10-year Gilts yielded 1.44 percent.

Vanraes told CNBC that he had quit his whole position in peripheral Italian and Spanish bonds in early January, ahead of the Greek national elections.

"QE was already in the price of the bonds," Vanraes said on Tuesday. "[But] the Greek election could have led to a surprise, so you have a very small expectation of gain and a very large spread widening probability."