Germany and Luxembourg government bond yields have tightened nearly 30 bps since the beginning of 2016, moving the S&P Germany Sovereign Bond Index and the S&P Luxembourg Sovereign Bond Index yields back into negative territory (see Exhibit 1). Yields on both indices last hit negative territory in April 2015, at the height of the Greek debt crisis. Swiss government bonds have been consistently negative since January 2015, and the S&P Switzerland Sovereign Bond Index is has tightened 22 bps since the beginning of 2016.
Due to the inverse relationship between yields and prices, while yields are negative the performance of these indices is positive. As of Feb. 8, 2016, performance of the S&P Switzerland Sovereign Bond Index was one of the highest in the eurozone, at 3.4% YTD; the S&P Germany Sovereign Bond Index came in at 3.04% YTD, and the S&P Luxembourg Sovereign Bond Index returned 1.70% YTD (see Exhibit 2).
Fears over the financial health of some of the larger European banks and the volatility in the stock market are causing risk aversion and are leading some investors into the relative safety of European government bonds. This, coupled with indications that the ECB might increase its QE program in March, could be setting the stage for continued negative yields with positive performance in this “safe” asset class.