Yields on the bond markets are on the retreat at the end of the week. After the highs of the past weeks and months, traders believe that this is only a technical counter-reaction for the time being.
29 September 2023. FRANKFURT (Börse Frankfurt). The relatively strong rise in yields so far in September had initially continued over the course of the week. In Japan, 30-year bonds reached their highest level in ten years this morning at 1.66 per cent. In the USA, ten-year bonds climbed to a 16-year high of 4.6 per cent and here in Germany, the yield on ten-year Bunds peaked at 2.97 per cent, just missing the 3.0 per cent mark. Currently we are at 2.85 per cent.
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This morning's data on price increases in the Eurozone came in slightly below expectations at 4.3 per cent year-on-year and a core rate of 4.5 per cent. Earlier, inflation in Germany had already fallen to its lowest level in two years. Consumer prices, which had risen by 6.4 per cent in August, were only 4.3 per cent above the previous year's level this time - also thanks to base price effects. However, according to the strategists at DWS, it is "still too early" for a general all-clear.
Perhaps this is why yields initially continued to rise over the course of the week. "Market participants are currently giving greater weight to positive economic news, which suggests that inflation will remain high, than to negative signals," says Hans-Joachim Lübbing of Commerzbank, explaining the upward trend that has continued until this morning. This is particularly noticeable at the long end, which has recently reduced the yield advantage of the price runners (inverse interest rate structure) somewhat.
Tim Oechsner, capital market strategist at Steubing AG, sees the reason for this primarily in the massive uncertainty regarding the interest rate policy of the US Federal Reserve. Fed funds futures are pricing in a further interest rate hike by the end of the year with a probability of around 40 per cent. A first full rate cut is currently only priced in for July. "The prospect of interest rates falling in the near future and thus bond prices rising is off the table for now, which significantly reduces liquidity in trading," says the bond trader, whose main complaint is the lack of buyers in the market. For the time being, he interprets the decline in yields at the end of the week only as a "technical countermovement" to the strong rise before.
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Strong demand for short maturities
At Baader Bank, Klaus Stopp also observes only isolated purchases of longer-dated bonds. "On the other hand, there is a lot of buying going on in the short maturities. Especially in the area of German government bonds with maturities of 12 to 18 months, there is brisk trading thanks to attractive conditions. For example, the German government bond (DE0001104909) maturing at the end of 2024 with a coupon of 2.2 per cent is currently trading at around 98.50 per cent, resulting in a yield of around 3.5 per cent.
The recent very strong US dollar has also put the focus of some investors on corresponding foreign currency bonds. "There is a little bit of action in USD bonds," says Stopp. In addition, there is buying from time to time in the "100-year bond" of the Republic of Austria (AT0000A1XML2). Due to its long maturity, the bond, which matures in 2117, is predestined for strong price fluctuations. By the end of 2020, the price had more than doubled to 230 per cent before the big crash began. Currently, the bond is only traded at 64 per cent, which also means a yield of 3.5 per cent.
New issue from Grenke with 7.5 percent yield
In corporate bond trading, Marcus Mielert of Oddo BHF points to a "very high-volume new issue with a retail-friendly 1,000 denomination". Specifically, this concerns the bond of Grenke Finance PLC (XS2695009998), which has been tradable since the beginning of the week and promises an annual coupon of 7.875 per cent with a term until April 2027. At a price of just over 101 per cent, this means a possible yield of 7.5 per cent.
At Steubing AG, on the other hand, the "perennial favorites" continue to be in demand. According to Oechsner, these are primarily the bonds of companies from the German automotive industry. These include, for example, a Volkswagen bond (XS2374595044) maturing in February 2027 with a yield of 4.4 per cent and a Mercedes-Benz bond (DE000A3LH6T7) maturing in May 2026 and currently yielding 3.8 per cent. The supplier Continental (XS2630117328) currently offers a yield of 4.1 per cent until maturity in June 2028.
By Thomas Koch, 29 September 2023 © Deutsche Börse AG
Thomas Koch is a CEFA investment analyst, investment specialist for structured products and certified certificate advisor. Since the beginning of 2006, he has been covering events on the capital markets as a freelance journalist.
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