Yields on long-dated German bonds fell back toward two-month lows on Wednesday ahead of a debt sale that should signal the extent to which investors have re-evaluated the pace of monetary tightening at home and abroad.
Europe’s benchmark borrower is set to sell 30-year debt on Wednesday following a more than 20-basis point decline in yields over the past month.
Yields tend to rise ahead of debt sales as investors make room in portfolios for the new supply but there was little sign of that in early European trading with oil prices wallowing at multi-month lows and dimming the outlook for inflation.
Weak inflation influenced the cautious tone expressed by the bloc’s central bankers at a meeting earlier this month and has made investors question whether the US Federal Reserve will be able to raise interest rates again this year after a hike last week.
A US policymaker said on Tuesday that low yields meant the central bank would have to be careful about raising rates further.
The Bank of Japan (BoJ) said it will lag well behind the Fed in dialing back its massive stimulus program, with inflation far from its 2 percent target.
“In a relatively quiet market we would normally expect some weakness ahead of the auction,” Mizuho strategist Antoine Bouvet said.
“But we think the bond will attract buyers given the monetary policy backdrop... As yields have fallen in the 10-year sector also, there will be more demand from investors that need to add yield to their portfolios.”
German 30-year bond yields fell 2-basis points to 1.05 percent on Wednesday, within a whisker of two-month lows of 1.04 percent hit last week. Ten-year equivalents were also down 2 bps at 0.25 percent, close to two-month lows.
At 169 bps, the gap between Germany’s two-year and 30-year yields was the lowest it has been this year.
This flattening of the yield curve tends to occur when investors start to question the long-term path for monetary policy and interest rates.
It has been particularly noticeable in the US where the curve is the flattest it has been in a decade.

Source: Arab News