The Eurosystem is only just beginning its sovereign bond purchase program. The central banks seem to be probing and testing the market. One interesting development has to do with negative yielding instruments. According to press reports, the ECB has acknowledged that there has been no agreement on what to do with losses from below zero interest rates. Roughly speaking around a quarter of European sovereign bonds have a negative yield.

The lack of agreement on how to treat losses seemed to suggest that officials might want to avoid such instruments for the time being. This may not be the case. Reports indicate that German, and possibly Dutch bonds with negative yields were bought in the last days.

Germany 5-year bunds, currently yielding -12 bp, were thought to have been bought. The Geman yield curve is negative through seven years. The 2 and 3-year yields are lower than the -20 bp deposit rate, which would exclude them from the bond buying program now. The Dutch yield curve is also negative out through seven years. No tenor has a yield less than -20 bp. 

Even if interest rate losses are incurred by the national central banks, they have buffers for these sort of things. The losses are likely to be modest and relatively easily absorbed. The bond market rally, for example, that is pushing yields below zero, generate profits for the same central banks. 

Officials are thought to be concentrating their efforts in the long-end of the curve. This is creating bullish curve flattening. The 30-year bond yields are falling further than 10-year yields, which are falling more than 2-year yields.

Marc Chandler​
Global head of currency strategy at BBH
​Marc to Market