Germany's government bond yields fell on Friday, with 10-year borrowing costs dipping to one-week lows following news that a climate package would be financed without new debt. Most bond yields across the bloc were lower on renewed friction in the Middle East and as a cut in a key Chinese lending rate bolstered demand for fixed income.
Yields in Germany, the euro area's benchmark bond issuer, fell after news that Germany's governing parties have agreed a new climate protection package, including a domestic carbon price. According to one source, the package would have a volume of 50 billion euros ($55 billion) through to 2023 and would be financed without new debt.
"There is this prevailing expectation that is priced into the (bond yield) curve that there will be massive stimulus from Germany, which we think is unrealistic," said Peter Chatwell, head of rates at Mizuho. German bond yields were 1-2 basis points (bps) lower across the curve. Germany's 10-year Bund yield dipped to -0.526%, its lowest in a week. The potential for increased spending, and bond issuance, by governments has been in increasing focus given weak economic growth prospects.
At last week's European Central Bank news conference, the bank's president Mario Draghi repeatedly called for governments to do more, fuelling concern that ECB policy is reaching the limits of what it can achieve alone.
The Netherlands and Finland this week announced budgets that will step up government spending. "It is important and a step in the right direction but the numbers and the timeline we're hearing is nothing significant that will have an impact on growth and inflation in the near-term," said Mohammed Kazmi, a portfolio manager at UBP, referring to the German climate package.
Across the euro zone, 10-year bond yields were 1-2 bps lower on the day with higher-rated bond markets supported by global risks. In the wake of last week's stimulus package from the ECB, southern European bonds have performed well. Greece's 10-year bond yield on Friday briefly hit a fresh record low at around 1.31%.
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