However, there is a limited supply of German government bunds. The German Treasury expects to issue about €147 billion of eligible bonds that mature two to 30 years while €132 billion of bonds will mature, so only a net new €15 billion in debt will be issued this year. Meanwhile, the ECB plans to buy €215 billion of German government bonds between this March and September 2016, or 26 times more than the German government bond market is predicted to grow over the same period.
Investors and institutions have been hoarding European debt. Banks and insurance companies use the bonds to meet regulator capital requirements and central banks utilize the debt to build foreign exchange reserves. ECB President Mario Draghi has stated that the bank will consider purchasing negative-yielding debt to entice current European bond holders but many are unable to let go.
“[European] passive investors and banks are unlikely to sell bunds in large size due to investment mandates and regulatory reasons,” Cagdas Aksu, rates strategist at Barclays .
Bond investors who believe the ECB’s push into German debt can also utilize the PowerShares DB German Bond Futures ETN (NYSE Arca: BUNL) to track German bonds and the leveraged PowerShares DB 3x German Bond Futures ETN (NYSE Arca: BUNT) to capitalize on potentially higher returns, but the leveraged option includes greater risks as well.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.