16 July 2012

FT: Dutch and German borrowing costs down

While shorter-term borrowing costs for Germany have been negative for some time – indicating that investors are essentially paying Berlin to keep their money safe – other "core" European countries have also seen their bond yields dip markedly.

French one-year and two-year borrowing costs hit a record low of 7 basis points and 27 basis points respectively last week, while the Netherlands sold €1.25 billion of three-month notes at a record low yield at auction of minus 0.041 per cent. The Netherlands late last week became the latest eurozone country to enjoy negative two-year borrowing costs, following Germany, Finland and Switzerland.

“Fundamentally, we remain buyers of core market duration and believe negative yields in the front end of the German curve can persist”, Peter Goves, a strategist at Citigroup, said. By contrast, the benchmark 10-year bond yields of Italy and Spain climbed once more, to 6.1 per cent and 6.82 per cent respectively, according to Reuters.

The bonds of other countries also regarded as relatively safe, predominantly those of the UK and the US, have also benefited from the rise in risk aversion.

Nonetheless, some investors are concerned that the sustained rally in “haven” assets could peter out eventually. Although few are betting against these bond markets for now, some are moving out of safer government bonds and into corporate debt and emerging markets, given the risks that yields – which move inversely to prices – could move swiftly higher if the global economy gets back on track.

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