As the markets weigh on Ukraine, Russia and the retaliatory sanctions, European investors jumped into safe-haven assets, lifting German bunds, along with related exchange traded funds, and pushing down 2-year note yields below zero.
Over the past three months, the PowerShares DB German Bond Futures ETN (NYSE Arca: BUNL) has gained 3.4% and the PIMCO Germany Bond Index Fund ETF (NYSEArca: BUND) rose 1.2%. Year-to-date, BUNL is up 8.7% while BUND is 2.9% higher.
Meanwhile, the leveraged PowerShares DB 3x German Bond Futures ETN (NYSE Arca: BUNT) increased 10.7% over the past three months and jumped 29.2% year-to-date.
Investors are now weighing the impact of Russia’s counter-sanctions on Europe, which could further impeded the recovery in the Eurozone. Observers are especially focused on the recovery after Italy unexpectedly returned to a recession. [A Look at German Bond ETFs]
The heightened uncertainty has pushed 10-year German bond yields to 1.06% Thursday, an all-time low, while the two-year note rate briefly dipped to minus 0.004%, the lowest since May 2014, Bloomberg reports. Bond prices have an inverse relationship with rates, so falling yields corresponds with higher prices.
“We’ve opened with a risk-off tone, mainly a reaction to what’s going on with Ukraine and Russia. People are focusing on the economic impact of the retaliatory sanctions,” Lyn Graham-Taylor, rate strategist at Rabobank, said in a Business Record article.
On top of the recent bond gains due to Russian troop movements on its borders and the counter-sanctions, German bunds have rallied after the European Central Bank reduced borrowing costs and introduced stimulus measures. Additionally, given the uncertainty over growth, many expect the ECB to enact additional measures to help prop up the economy.
“It’s going to be a very long time before the ECB starts raising rates and that scenario is being pushed further out with low inflation, weakness in data and what’s going on in Ukraine,” Allan von Mehren, chief analyst at Danske Bank A/S, said in the Bloomberg aritcle. “People are moving their money into safer assets. Yields could stay negative if Ukraine continues to escalate.”
BUNL and BUNT track the exposure of the U.S. dollar value of returns of a German bond futures index, which is comprised of Germany-government issued debt, or Bunds, with a remaining maturity of between 8 to 10 years.
The PIMCO Germany Bond Fund tracks euro-denominated investment-grade German bonds. The ETF has a 5.46 year duration and a 0.45% 30-day SEC yield.
PowerShares DB German Bond Futures ETN
For more information on the fixed-income market, visit our bond ETFs category.