The 10y Bund had been on a strong bull run from 2014 to 2017, its yield having oscillated around zero and remaining at extremely low levels. The main drivers for this move were falling inflation, low global economic growth and flight to safety. At first glance, it might make no sense to buy government bonds at negative yields – effectively lending money to a government and paying interest for the privilege. However, there are always reasons for such hard-to-explain levels, such as (a) speculative buying i.e. buying in order to sell higher at a later date (b) institutional buying based on regulations and guidelines (pension funds etc).
The ECB’s multi-year easing monetary policy had for years provided weakness to the Euro and support to Bunds. The fact that other major government bonds were also at historically low yields helped Bunds along the way. Global bonds had performed extremely well since the GFC and although many commentators labelled them a “bubble”, they remained resilient.
The ECB & Fed turning more dovish in 2019 provided more support for bonds, and the Covid-19 outbreak led most major central banks to unleash the biggest wave of monetary easing since the 2008 crisis. The 10y Bund yield dropped to very negative levels, but it’s unlikely that they will be able to stay there for long. Even Germany is toying with the idea of fiscal stimulus, and either way the Bund yield should gradually move back to zero or marginally positive levels.