The amount of euro zone government debt with negative yields has risen to its highest level so far this year after France elected a president seen as relatively market-friendly and the European Central Bank’s bond-buying scheme keeps borrowing costs low.
Tradeweb data released on Monday showed nearly 46 percent of the more than 7 trillion euros ($8 trillion) of the bloc’s government debt had yields below zero at the end of May.
Analysts said France’s voting for centrist Emmanuel Macron as president in May allowed shorter-dated bond yields in the euro zone’s second biggest economy to drop.
Added to that, the ECB’s bond-buying scheme and the view that the bank is unlikely to rush into scaling back purchases even as growth picks up is putting persistent downward pressure on yields.
“One thing that may have helped that statistic is that political risk out of France has been priced out and allowed a bigger share of bonds in this market, one of the biggest in the euro zone, to trade negative,” Mizuho rates strategist Antoine Bouvet said.
Of about 7.3 trillion euros of debt in the system, about 3.3 trillion yielded less than zero at the end of last month, according to Tradeweb. That is highest share since December and is up from around 44 percent at the end of April.
Tradeweb’s data shows almost 27 percent of euro zone government bonds yield less than the ECB’s deposit rate of minus 0.4 percent, also the highest share since December.
French five-year bond yields had traded above zero for much of March and April but dipped back into negative territory after Macron’s win in the first leg of elections on April 23 eased concerns about French political risks.
ECB policymakers meanwhile are expected to take a more benign view of the economy when they meet this Thursday. But the bank is not expected to start scaling back its stimulus too soon given that inflation is weak, helping to keep a large chunk of the bloc’s short-dated bond yields below zero percent.
Germany’s two-year Schatz yield for instance is trading at minus 0.71 percent, well below the ECB’s minus 0.40 percent deposit rate.
“Another thing that may have influenced bonds trading negative is rate expectations and the ECB. There’s very little chance of the market repricing expectations soon,” Bouvet said.