They don’t call it the Schatz for nothing. The term — market parlance for German two-year debt — means ‘darling’ in its native language. Little wonder, then, that this pocket of the eurozone government bond markets has become the centre of an intense love affair.
Having fallen as low as minus 0.95 per cent in February, yields on the beloved debt now stand at a still eye-popping minus 0.84 per cent. Buyers are clearly willing to wear a substantial nominal loss on this cherished asset.
It seems nothing can break the spell — not even the persistent trickle of economic indicators that would usually cause the rally to unravel, notably a rise in annual eurozone inflation to 2.1 per cent and the fastest pace of German price rises in four years. Markets are even pricing in a one-in-four chance that the European Central Bank will start to raise interest rates this autumn.
The ECB itself has noted that something is out of line, with president Mario Draghi saying it is monitoring “distortions” in short-term German debt “quite closely”. Much of the strength comes from the European political circus, which ramps up demand for super-safe assets, he added.
Mr Draghi’s monitoring should produce speedy results, given that the ECB itself is playing a major role under its programme of buying €80bn a month of debt. In January, rules were loosened, allowing the German national central bank to expand its shopping list by buying short-term debt yielding less than the deposit rate of minus 0.4 per cent.
The result is that the weighted average maturity of debt bought by the Bundesbank under the ECB programme collapsed “very rapidly and very aggressively”, as Frederik Ducrozet at Pictet puts it, from 9.4 years to 4.3 years in January and February. It is not just the German central bank buying, either. Bank of America Merrill Lynch reckons that a large chunk of the rally can be attributed to buying by the central banks of Switzerland, Denmark and the Czech Republic, all of which are snapping up euro-denominated assets in an effort to prevent their own currencies from growing too strong.
It looks like something has to give. A break in the European political clouds would take out some of the heat. But price-insensitive central banks are smitten for now.
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