uploads///European Government Bond Yields Are Extraordinarily Low

Why Some European Bond Yields Have Turned Negative



Finding value in today’s markets has been difficult, so it’s no surprise that many investors are turning to opportunities outside of the U.S. (SPY). But where should they look?

We think the eurozone (IEV), and in particular Germany (EWG), looks attractive due to several factors:

Quantitative easing (or QE)—The European Central Bank’s (or ECB) $1.1 trillion bond-buying program has pushed yields to negative territory in some cases, driving investors toward dividend-paying stocks to seek income.

Valuations—European stock valuations are low relative to other global markets. As the regional European economy gains momentum, now may be a good time to consider investing for the potential growth ahead.

Currency—Export-oriented companies in the eurozone, and especially German companies, may benefit as the weakened euro can help improve their revenues.

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Market Realist – Some European bond yields have turned negative.

The graph above shows the yield on the 10-year government bonds in Germany, Switzerland, and France since 2010. The yields currently stand at 0.2%, -0.1%, and 0.5%, respectively.

The yields have been dropping in this period, initially due to deflationary pressures in the Eurozone. This led to investors preferring government bonds over stock, especially the safer ones, including the German Bunds.

The ECB cut lending rates initially to revive demand in the Eurozone, and it recently started the European version of quantitative easing (or QE) to lend more support to the economy. This led to a further dip in European government bond yields. With the QE likely to continue for another 18 months, we are likely to see even lower yields.

This makes US Treasuries (TLT) (IEF) more attractive for investors living in economies that are seeing such low yields. This demand could keep Treasury yields low for a while, despite the possibility of a rate hike.

The rest of the series will explore why the Eurozone, and particularly Germany, could be a good investment option at the moment.


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