Reality check US policy, ECB tightening to push up German bond yields

Interest rates remain low but a number of factors are weighing on bond prices, which could result in dramatically higher yields.
Quelle: Reuters
Gazing into the crystal ball.

Restrictive monetary policy at the US Federal Reserve and suspension of the European Central Bank’s asset purchase program will push yields on the German 10-year bond higher this year, analysts say.

Yields could reach 0.80 percent, more than tripling from the current 0.23 percent, but relatively modest by historic standards. A recent Handelsblatt survey among 30 domestic and international banks showed 12 of them expected a yield of at least 0.80 percent on German 10-year bonds.

It will still be hard to make any money investing in bonds, says Deutsche Bank strategist Ulrich Stephan. “The environment is difficult,” he says. “Still the only way to get yield on bonds is by taking risk.”

Government bonds of countries like Germany are considered the least risky type of investment. Yields on bonds go up as prices go down, so that bond prices tend to go down as central banks tighten monetary policy and push up interest rates.

Another factor for lower bond prices and higher yields this year will be less pressure to seek safe haven investments as some of the current tensions, such as Brexit and Italy’s budget, fade.

Berenberg Bank analyst Bernd Meyer expects the Fed to hike interest rates once again in the first half of the year, after five successive quarterly hikes of a quarter-point to the present level of 2.25-2.50 percent for overnight fed funds. But Fed Chairman Jerome Powell on Friday said the US central bank will be increasingly flexible and would raise rates only if the economy was strong enough to warrant it.

A more direct influence is the ECB’s halt to its new bond purchases, although it will continue to reinvest principal from maturing bonds. The absence of central bank buying will weigh on bond prices throughout the EU and push yields slightly upwards, says Marco Bargel, chief economist at Postbank. He also expects the ECB to start raising its interest rates in the fourth quarter this year, pushing down bond prices and pushing up yields.

Of course, not every analyst thinks German yields will rise that quickly. Robert Halver, head of capital market analysis at Baader Bank, says the ECB’s reinvestments will keep ample liquidity in financial markets. This should support demand for bonds, especially those of safe haven Germany.

Robert Landgraf is deputy chief of the finance department at Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the author: [email protected].