By Daniel Kruger
Government-bond yields throughout much of Europe fell to records after European Central Bank President Mario Draghi signaled the bank could roll out fresh stimulus as soon as its next policy meeting in July.
In a sign of deepening pessimism about the European economy, the yield on German's 10-year securities, the benchmark for the region, fell to negative 0.320%, while the yield on 30-year Swiss government debt fell briefly below zero. Five other European countries have 10-year debt at below zero yields, and the rate on French government securities briefly fell below zero for the first time.
Investors who buy debt with yields below zero are paying more for their bonds than the total of all future principal and interest payments, meaning they are effectively paying governments to hold their money.
That means some investors are increasingly willing to buy government bonds and accept a loss in exchange for the future return of capital. About 25% of global developed-market debt and 46% of government debt from the countries that use the euro trade at negative yields, according to BlackRock Inc.
With negative yields so pervasive, some investors have turned to riskier credits in Europe to generate income. The yield on the 10-year government debt of Greece, a country that several years ago appeared headed toward default, settled at 2.537%, about 2.85 percentage points more than German debt of comparable maturity. That compares with a gap of more than 7 percentage points in early 2017.
The ECB's pivot to policies meant to stimulate growth is a sign that the economy is at risk of getting further bogged down in period of little expansion and an absence of inflation. Last year officials had planned to follow the Federal Reserve's lead by reducing monetary policy support for the economy. European officials last year curtailed billions of euros of monthly bond purchases and had predicted they could raise interest rates this year.
"Confidence in the economy over there has fallen like a rock," said Colin Robertson, managing director for fixed income at Northern Trust Asset Management.
Government securities, which become more attractive when economic growth is slowing, extended gains after the European Union said exports from the eurozone to the rest of the world fell 2.5% in April from the month before and the German ZEW Index, a gauge of financial market confidence, retreated in June.
Mr. Draghi said Tuesday that ECB policy makers would consider in the coming weeks how to adapt their policy tools "commensurate to the severity of the risk" to the economic outlook. Options include extending the time frame before the next interest-rate increase, a reduction in the already negative policy rate or restarting bond purchases.
An aging population and tepid economic growth mean that the ECB may have to try more drastic solutions, such as buying stocks, said Rick Rieder, BlackRock's global chief investment officer of fixed income.
"People say negative rates can only go so far -- I think European rates are still going lower," he said.
Mr. Rieder said that he continues to find value in U.S. government debt and in high-quality corporate bonds and he expects European government bond yields will continue to fall.
The yield on the U.S. government benchmark 10-year Treasury note on Tuesday settled at 2.060%, its lowest closing level since September 2017. It had fallen to as low as 2.017%, according to Tradeweb.
Mr. Draghi's support for additional ECB stimulus could make it easier for Fed Chairman Jerome Powell to signal that U.S. officials plan to join the ECB in supporting growth by cutting rates.
With stocks and bonds rallying on expectations that the ECB will become more supportive, the Fed would risk undermining market confidence if U.S. officials appeared disinclined to take steps to prevent growth from slowing, Mr. Rieder said. Such a move could revive volatility in stocks and a flight to safe assets, as happened in December when Mr. Powell sounded more hawkish than expected at a press conference after the Fed raised rates.
"That makes it very hard for Chairman Powell not follow down their path, " Mr. Rieder said.
Write to Daniel Kruger at Daniel.Kruger@wsj.com
(END) Dow Jones Newswires
June 18, 2019 17:13 ET (21:13 GMT)
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