Global deflationary concerns are helping to support European fixed-income markets and German bond-related exchange traded products.
Over the past month, the DB German Bond Futures ETN (NYSE Arca: BUNL) rose 1.3% and the leveraged DB 3x German Bond Futures ETN (NYSE Arca: BUNT), which tries to reflect the three times or 300% daily performance of German bonds, gained 7.9%.
Additionally, the ProShares German Sovereign/Sub-Sovereign ETF (NYSEArca: GGOV), which is comprised of investment-grade sovereign or sub-sovereign bonds, excluding corporate debt, rose 1.4% over the past month. GGOV also saw trading volume spike three times its daily volume Friday.
Nevertheless, potential investors should be aware that the three German bond-related ETPs, or exchange traded notes and exchange traded funds, are still relatively small have have low trading volumes, so traders should utilize limit orders to better control trades.
The German bonds are rebounding as oil prices slide and market observers bet on low inflation across the Eurozone, reports Lukanyo Mnyanda for Bloomberg.
The yields on 10-year Germany bunds are now hovering around 0.66%, compared to a 0.95% high in June – bond yields and bond prices have an inverse relationship, so a falling yield corresponds with rising prices.
Bill Gross, money manager at Janus Capital Group, has also warned of a deflationary global environment, pointing to how the CRB Commodity Index is not just at a cyclical low but lower than in 2008 during the financial downturn, Bloomberg reports.
Consequently, the deflationary outlook overseas has bolstered the attractiveness of government debt, which would produce improved real yields, or the nominal yield minus expected inflation.
Moreover, the strengthening U.S. labor market and economy are fueling speculation of a Federal Reserve interest rate hike as soon as next month, fueling a diverging play between the Fed and European Central Bank monetary policies.
Additionally, the deflationary environment in Europe has also fueled speculation that the ECB could prolong its quantitative program. The ECB has enacted a 1.1 trillion euro program that will last until at least September 2016.
“The divergence trade is very much firmly in play,” Marc Ostwald, a strategist at ADM Investor Services International Ltd., told Bloomberg. Falling oil prices mean “the risk is lower for longer from the European Central Bank. The German economy hasn’t been exactly firing on all cylinders.”
DB German Bond Futures ETN
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.