LONDON Aug 20 German two-year debt yields held
close to 15-month lows below zero on Wednesday with record low
money market rates and bets for further ECB easing underpinning
demand before an auction of up to 5 billion euros of a
Data last week showing the euro zone economy stagnating in
the second quarter even before the sanctions imposed on and by
Russia over the conflict in Ukraine cemented expectations of
ultra-low European Central Bank interest rates for a long time.
It has also rekindled expectations the ECB could eventually
print money to buy debt. A Reuters poll this week showed money
market traders saw a 50 percent probability of a bond-buying
programme in the next 12 months, up from a one-in-three chance
in last week's survey.
German bond yields, the benchmark for euro zone borrowing
costs, trade around zero for maturities of up to four years.
"This is a combination of expectations of very low rates for
a very long period of time but also a reflection that the market
has raised the odds of the ECB being drawn into taking more
serious action," said Elwin de Groot, a senior market economist
at Rabobank in Utrecht.
Two-year bonds yield minus 0.006 percent,
meaning buyers will get slightly less money than they invested
when the bond comes due.
Some banks may prefer that rather than being charged 10
basis points for keeping the money in the ECB's deposit facility
- a result of the central bank's unprecedented deposit rate cut
into negative territory in June.
Two-year yields in France, Belgium, Ireland, the
Netherlands, Austria and Finland trade between 0.03 and 0.06
percent. The highest-yielding two-year euro zone bond is
junk-rated Portugal's at 0.84 percent.
The overnight bank-to-bank Eonia lending rate fell
to a new record low of 0.005 percent, as the euro zone banking
system enjoys plenty of spare cash - now at around 134 billion
euros - and is due to receive up to 1 trillion euros of cheap
ECB loans (TLTROs) from September.
"The prospect of increased liquidity post TLTROs ... seems
likely to support front-end yields at these very low levels for
some time to come and could be a possible source of demand at
the auction," Barclays strategists said in a note.
Germany's auction results are due around 1130 GMT.
(Reporting by Marius Zaharia; Editing by Andrew Heavens)