As a phenomenal year for bond markets draws to a close, investors in Germany, the euro zone's benchmark bond issuer, are set to reap their best returns in five years.
Those who bought 10-year German government bonds at the start of 2019 are looking at a return of almost 6%, which would mark the best returns since 2014, according to Refinitiv data.
That performance reflects a year where a bitter trade war, recession fears and a major shift in central bank policy towards easing boosted demand for safe-haven sovereign debt.
As those risks unwind, triple-A rated German bonds are not expected to do as well in 2020. Brexit and trade war uncertainties have ebbed for now. Rate cuts and stimulus from the likes of the US Federal Reserve and European Central Bank have eased recession fears.
"Bunds will return less in terms of capital appreciation next year after a stellar 2019," said Ross Hutchison, fixed-income fund manager at Aberdeen Standard Investments.
"There are plenty of positive forces out there for Bunds: anaemic European inflation, the net negative supply thanks to ECB QE (quantitative easing). But the low (yield) levels we're already seeing, a growing sense of monetary policy fatigue, and the looming threat of fiscal expansion all act as brakes on how much we will likely rally from here."
BlackRock Investment Institute said last week it was underweight European government bonds. Citi's euro zone economic surprise index is at its most positive level since early 2018, suggesting the gloom is lifting.
German bond returns, at least on 10-year debt, are slightly below those of positive-yielding US peers this year. Still, Bund performance looks remarkable for a market repeatedly written off for being too expensive and offering little value after massive ECB stimulus in recent years pushed borrowing costs down sharply.
Even after recent selling, 10-year German yields are down 55 basis points this year at -0.28% - set for their biggest annual fall since 2014.
"Bund returns are over 10% in total return terms and are ahead of what most people assumed," said Joseph Little, chief global strategist at HSBC Global Asset Management.
At the height of the bond rally in early September, the entire German yield curve was below 0% and Bund yields had dropped to -0.74%. At the end of last year, the 12-month forecast for Bund yields was 0.90%, according to a Reuters poll of analysts.
"The bond rally this year highlights how wrong the consensus was that core euro zone would underperform in the wake of the end of QE," said Richard McGuire, head of rates strategy at Rabobank.
The ECB ended asset purchases at the end of 2018, but in September said they would resume, given the weak economy.
Today, year-end 2020 forecasts vary widely, highlighting the breadth of views on the economic outlook.
"This partly reflects the fact that the strong returns of 2019 have been a big surprise for many investors. At this point, prospective long run returns look poor for Bunds," said HSBC's Little.
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