The data on the German economy that worries the market overlap with expectations of greater flexibility in European monetary policy. The debt market is carried away by purchases at the beginning of the week and this reduces the profitability of bonds on the secondary market, especially those with shorter maturities. Thus, the German bond the two-year bond rises to 2.14% while the ten-year bond falls to 2.15% This smooths the debt curve, which has been inverted until now.
The last time the two-year German debt was lower than the yield offered by the pack German was in November 2022. And for most of that time, investors and experts had a restrictive policy of the European Central Bank (ECB). However, since the ECB made its first downward adjustment this summer, the benchmark debt for the European market has started to lower its yields and increase its bond prices.
Now, experts are concerned about a stagnant German economy that could condition the growth of the entire eurozone. Therefore, market expectations collected by Bloomberg predict a more aggressive rate cut by the European Central Bank in the next twelve months, which affect the shortest maturities of the curve more than the longest maturities, to avoid the economic contraction of the European engine cause greater havoc. If at the close of last week the contracts OIS (overnight indexed swap, in English) gave a greater probability to a 25 basis point cut for the remainder of 2024, now a possible 50 basis point cut between the two remaining ECB meetings takes on more weight.
For now, all German debts of less than two years offer more attractive yields than the 2.14% of 24-month securities. At this stage, it is the six-month debt that has the highest yield, over 3.1%. However, the German debt curve is gradually emerging from the investment that has existed for more than two years. So far in September, two-year German bonds have fallen by more than 25 basis points, while in the case of pack It’s 15 points.
This is not an isolated case in other bond benchmarks. In the same way as in the German case, the difference between the two- and ten-year debt of UK bonds was previously normalized in the UK. The easing of monetary policy by the Bank of England has brought the ten-year bond to 3.95% (below this yield for 24-month securities). And the same thing happened in the US last month, before the 50 basis point cut announced last week, where the US ten-year bond is already more than 15 basis points ahead of its two-year benchmark.
The fall in yields is already a reality in the main debt markets but also in shorter maturities. This represents a new opportunity for the investor who can take advantage of the rise in bond prices. The director of financial investments of Mutualidad, Pedro del Pozo, considers that the focus is now on tranches with a duration of up to three years, where there is greater potential for revaluation due to the “positivization of the curves”, the expert points out.
European investment grade sovereign debt up to three years offers the investor a profit of 2.8% compared to 1.86% of debt between seven and ten years or 0.4% of the increase recorded by all sovereign bonds of more than ten years. The differences are larger than those recorded on the American public debt market, where the shortest maturity tranche offers 4.4% (up to three years of maturity) while all bonds of more than ten years are close to 4.1%, according to Bloomberg.
