German Bonds Low Yields Will Pressure ECB

Europe’s debt crisis is a fading memory, its most-indebted nations have never been able to borrow so cheaply and growth is returning, yet German bonds, a key gauge of economic malaise, are setting the sort of records usually reserved for times of turmoil.

Bunds have joined a rally that’s swept borrowing costs to record lows across the euro area. The last time their yields plumbed such levels was when the region was in the grip of a downturn that threatened the euro’s existence. That they’ve dropped further reflects concern that the European Central Bank’s plan to stave off deflation and boost growth can’t work without further stimulus.

“Yields are low and I suspect they will probably go lower as deflation remains a real risk given the growth and inflation outlook,” said Robin Marshall, director of fixed-income at Smith & Williamson Investment in London. “There is a strong perception in the market that the ECB will have to ease policy further.” Smith & Williamson manage the equivalent of $25 billion in assets.

At first glance, ECB President Mario Draghi’s efforts to save the region appear to have worked. His pledge at the height of the crisis in July 2012 to safeguard the euro with measures that may include the purchase of member nations’ bonds helped steer yields such as Spain’s to the lowest on record from the highest in the euro area. The caveat is that success hasn’t translated into faster consumer prices or jobs growth, prompting Draghi to delve further into his stimulus toolkit.

via Bloomberg

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