Negative-Yielding Euro-Area Debt Becomes History as ECB Pivots

(Bloomberg) — All benchmark bonds in the euro area are yielding more than zero for the first time since 2014 as investors brace for the end of ultra-accommodative policy in the region.

The rate on government debt maturing in at least two years is positive across the entire currency bloc, with short-end yields driven higher by hawkish comments from European Central Bank officials. Traders are now pricing in three quarter-point interest-rate hikes in 2022, which would take the ECB’s deposit rate above zero for the first time since 2012.

“The monetary policy outlook is changing, potentially rapidly, due to the very different inflation outlook,” said Jan von Gerich, chief strategist at Nordea NRDBY in Helsinki. “And while the market is already pricing a lot from the ECB, the direction is clear. So I think in the bigger picture, yields will continue higher.”

It’s yet another symbolic milestone for investors in Europe, where sub-zero yields have been a reality across the curve for almost a decade. Negative rates occur when the price of a bond is more than the interest and principal it would return if held to maturity. Investors have been willing to accept this exchange, given the ECB’s policies of negative deposit rates and bond buying to stimulate the economy.

Many countries, and especially infrequent borrowers, don’t have an outstanding benchmark that closely aligns with a two-year horizon. The Finnish two-year benchmark, which was the last to go positive, is linked to a bond with a maturity closer to 18 months.