Frankfurt Investors have a long way to live with negative interest rates in the bond market. Economists and bond strategists from major institutions of the Federal Association of Public Banks (VÖB) voted to give investors their half-yearly interest rate forecast.
Economists expect the European Central Bank (ECB) to push bank deposit rates further into negative territory at Thursday’s meeting from the current minus 0.5 percent.
The deposit rate has long been the ECB’s main governing body, as the interest rate on loans to banks has been at zero% for three years. The US Federal Reserve has already cut its key interest rate over the past week and the Bank of England responded on Wednesday morning.
At the same time, economists from the main member institutions of the VÖB expect the ECB to set out its bond-buying programme. Alexander Aldinger of BayernLB expects monthly bond purchases to increase by ten billion euros to 30 billion euros. Daniel Lenz of DZ Bank expects monthly purchases to double to 40 billion euros.
Minus one percent as a target
All this has an impact on bond yields. Thomas Meißner of Landesbank Baden-Württemberg (LBBW) says of the development of recent weeks: “The yield on the ten-year federal bond falls like a stone.” An end to the descent is not foreseeable for him and an early drop below the figure of minus one percent is not excluded.
Since the end of last week, investors’ run on safe government bonds has intensified. Uncertainty about the effects of the coronavirus drives investors out of stocks and bonds. Reflecting on rising bond prices, returns for start-ups will fall if they hold bonds until the end of maturities.
On Monday, the yield on the 10-year German government bond was at an all-time low of minus 0.91 percent. Within three days, the yield fell by 0.3 percentage points.
In the US, the movement is also clear. The yield on the 10-year Treasury note monday recorded an all-time low of 0.31 percent, but rose back to 0.55 percent on Monday night. These almost erratic moves for bonds show how nervous investors are.
The last time the 10-year Bund yield was minus 0.77 percent, while in the United States it was plus 0.72 percent. But this can also be reversed quickly. “The next big bet is probably the negative yields on 10-year U.S. Treasuries,” meißner says, “That would have been the last bastion in the bond market.”
Looking ahead to the next six months, however, the economists surveyed by the VÖB expect yields to be slightly higher than it is now. The 10-year Bund yield fell 0.4 percent (BayernLB and DZ Bank) to minus 0.6 percent (NordLB) in October.
For the yield on the 10-year U.S. government bond, the six-month bond yield ranges from 0.9 percent (NordLB) to 1.2 percent (LBBW).
Behind the predictions of slightly higher yields in six months is the assumption that the wave of infections will only temporarily weigh on the economy. But economists aren’t sure about these assumptions.
For Ulrich Kater, chief economist at Dekabank, it is conceivable that scepticism about the coronavirus and the effectiveness of the countermeasures will continue or even increase. In this case, equity markets would probably fall even further – and bond yields would be lower in six months than they are today.
More: Now all eyes are on central banks