BONDS

German bonds, cast aside by investors last year in favour of higher- yielding Spanish and Italian bonds, appear to be coming back in fashion in 1997.

So far this year, 10-year bund yields have fallen by almost half a percentage point amid growing confidence that inflation represents little threat to the German economy. From a peak of 6.58 per cent last year, German borrowing costs have fallen by more than 1 per cent.

But even these near-record-low yields, and steep prices, aren't keeping bond buyers away, for at least two reasons.

First, yields are falling in other bond markets; second, concerns are once again growing about the proposed single European currency.

"Everywhere you look, bond markets are breaking historic lows, so it's logical that German bond yields are looking more attractive," said Rainer Back, chief fixed-income analyst at Dresdner Kleinwort Benson.

Mr Back predicts bund prices will continue to rise in the coming months, sending yields as low as 5 per cent, as the key deadline for the single currency approaches.

Would-be members of the monetary union have just 12 months to get their economies into shape and meet rules on inflation, long-term interest rates and exchange rates, as well as limits on budget deficits and public debt.

In 1996, confidence that many governments would make an effort to join a common currency encouraged investors to pour money into so-called "convergence trades", buying Spanish and Italian bonds in the belief that their inflation rates would fall to levels seen in Germany.

Those trades pared the yield premiums these peripheral bonds offered over German bunds. A year ago, an investor buying Italian rather than German 10-year bonds receieved 470 extra basis points of yield. Today, investors get just 170 basis points more. Six months ago, the Spanish 10-year bond gave investors 262 basis points more in yield. Today, investors get just 111 basis points more.

The trend, however, may have run its course. "You've pretty much had your lot as far as convergence is concerned," said Stephanie Mason, who manages $3bn (pounds 1.9bn) at WorldInvest. "More and more people seem to have very high holdings of German bonds."

Much of the doubt surrounds Italy, where there's concern that the coalition government is too divided to deliver compliance with the single currency requirements. Doubts like that lure investors back to Germany, the European country with the best post-war record of fighting inflation.

"At the moment, Germany looks very interesting to me," said Werner Blum, who manages DM10bn (pounds 3.7bn) at DWS Deutsche Gesellschaft. "Depending on which way the EMU discussion goes, we could well see another flight into German marks." Copyright: IOS & Bloomberg

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?