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How eurozone QE is reshaping the bond markets

If Europe’s economy remains in crisis, then someone please tell the bond markets. The ECB’s asset purchase programme has driven half of the EU’s sovereign debt pile into negative yield territory. And Draghi’s plan has only just started. Funds see little choice but to follow the QE monster on its path of destruction through the yield curve. Will that lead to the surreal outcome of all EU sovereigns yielding the same, regardless of credit quality?


Germany, Switzerland, fine. But Ireland?

On March 19 Ireland’s National Treasury Management Agency (NTMA) sold €500 million of short term T-bills at a negative average yield of 0.01%. Investors are now paying for the privilege of lending money to a sovereign that only exited its €67.5 billion Troika bail-out programme in December 2013 – 15 months ago – and had a gross government debt-to-GDP ratio of 110% in 2014.

The six-month trade attracted €2 billion-worth of bids. If this looks baffling to the man on the street, it seems to be no less so to those in the business of buying and selling bonds themselves.

“The world we are in is quite extraordinary,” says Chris Wightman, senior portfolio manager at Wells Fargo Asset Management’s Global Opportunity Bond Fund. Speaking to Euromoney in March, he declares: “We are in uncharted territory and setting new precedents by the month. Whichever asset class you are in, it is very difficult to manage your way through it.”

Ireland’s outstanding bonds are just part of nearly $2 trillion worth of European government paper, roughly half of the market, that has been trading with negative yields for some time: a phenomenon that Goldman Sachs’ chief operating officer Gary Cohen recently stated “freaks him out”.

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