October 28, 2015 / 8:40 AM / 3 years ago

German Bund yields below 0.50 pct before auction

LONDON, Oct 28 (Reuters) - Bund yields held around their lowest in almost six months on Wednesday, with an auction of up to 3 billion euros of 10-year German debt to offer clues of how strong demand is below the psychological barrier of 0.50 percent.

With the memory of a painful May sell-off fresh in investors’ minds, top-rated Bunds struggled to break past that level in recent months even during when German stocks were losing heavy ground.

But signals from European Central Bank President Mario Draghi that rate cuts are back in the policymakers’ toolkit and that more bond-buying might arrive in December seem to have given investors enough courage to test those waters again.

Bund yields were little changed at 0.45 percent, near their lowest since early May.

“We thought that 50 basis points would be the lower bound of the Bund range for longer, but they broke below and this has to do with the market expecting more quantitative easing and more negative deposit rates,” KBC strategist Piet Lammens said.

“We still hesitate to favour lower yields, they are already very low.”

The last time Bunds traded at those levels, they were half-way on a sharp retreat from near zero to above 1 percent.

That sell-off was caused by a swift reversal of bets that 10-year yields would turn negative soon after the ECB launched its current trillion euro quantitative easing programme.

With the market almost unanimous in that view, a temporary uptick in inflation saw investors scrambling to reduce Bund positions, and the sell-off spiralled out of control. Many suffered double-digit losses during that episode.

Analysts say that experience may hurt demand at the auction, although its small size and upcoming debt repayments may help to ensure a smooth sale.

Recent auctions of long-term German debt have failed to attract enough demand to cover the amount on offer, a phenomenon that usually occurs when investors do not see yields falling any further from their level just before the sale.

At the other end of the spectrum, Portugal’s president accepted on Tuesday the line-up of a new minority government that will be sworn in on Friday. That starts the countdown on persuading the opposition-dominated parliament to accept its programme or face the collapse of the cabinet.

Ten-year Portuguese yields were flat at 2.47 percent, having risen more than 20 basis points from the lows hit in the aftermath of last week’s ECB meeting.

Across the Atlantic, the Federal Reserve was expected to keep U.S. interest rates unchanged. Investors are sceptical that it can tighten policy this year at all in the face of slowing economies and stubbornly low inflation worldwide. (Reporting by Marius Zaharia, editing by Larry King)

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