Dutch 10-year bonds become latest member of sub-zero yield club

By: | Published: July 11, 2016 6:46 PM

The Bank of England, meanwhile, meets on Thursday amid heightened talk it could deliver more stimulus to shore up the British economy after Brexit.

French 10-year yields touched a new record low below 0.1 percent on Monday. (Source: Reuters)French 10-year yields touched a new record low below 0.1 percent on Monday. (Source: Reuters)

Dutch 10-year government bond yields fell below zero percent for the first time on Monday, expanding the growing global pool of bonds whose yields have turned negative as investors fret about economic growth.

A global collapse in bond yields has gained momentum since Britain’s vote to leave the European Union, a potential shock to the world economy that has put the onus on central banks to deliver further monetary stimulus.

In the euro zone, nearly a third of government bonds are now no longer eligible for the European Central Bank’s quantitative easing scheme because they have yields below the central bank’s deposit rate, putting pressure on the ECB to revamp its asset-purchase programme.

And with German debt with maturities out to 15 years yielding below zero, investors have piled into other core European bond markets in search of a return – driving their yields lower still.

Dutch 10-year yields, down more than 30 basis points since the Brexit vote, dipped to minus 0.008 percent — the latest to fall into negative territory.

“We are in a post-Brexit world where investors are looking at the consequences — driving demand for safer havens in Europe,” said DZ Bank strategist Christian Lenk. “The zero barrier is a number we appear to be crossing regularly.”

Fitch Ratings said the Brexit vote has pushed the amount of negative-yielding debt globally to $11.7 trillion. Since Brexit, German 10-year yields have fallen deeper into negative territory, while the entire Swiss yield curve is sub-zero .

French 10-year yields touched a new record low below 0.1 percent on Monday.

Expectations for more ECB stimulus also helped push German two-year yields to minus 0.703 percent, matching a record low hit the day after the Brexit vote. They stand some 30 bps below the ECB’s minus 0.40 deposit rate.

“Even though I disagree with the market pricing, it’s clear investors are expecting more ECB action with Brexit likely to have a negative impact on the economy,” said Cyril Regnat, fixed income strategist at Natixis.

On Friday, the International Monetary Fund cut its euro zone growth outlook for the next two years on uncertainties sparked by Brexit. The IMF now expects the bloc to grow 1.6 percent in 2016, down from a previous forecast of 1.7 percent.

Money markets in the past two weeks have moved to price in a greater chance of a further cut to the ECB’s deposit rate, with a 10 bps cut fully priced in by the end of the year.

The Bank of England, meanwhile, meets on Thursday amid heightened talk it could deliver more stimulus to shore up the British economy after Brexit.

Any policy action from Britain’s central bank could stoke expectations of further ECB easing.

“No matter how you look at the UK, it is intertwined with the euro zone and what happens there will have to be taken into consideration by the ECB,” said Rabobank fixed income strategist Matthew Cairns.

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