Germany's 10-year Bund yield hit a new record low on Friday and was within a hair's breadth of zero, as worries about global growth and political risks ensured a bullish tone for safe-haven debt markets across the globe. As Bund yields took a step closer to negative territory, Germany's 30-year yield hit its lowest level in over a year.
There has been little let-up in the downward march in yields across the world this week as a host of factors drive investors into fixed income. These include uncertainty about the outcome of Britain's June 23 referendum on European Union membership and a scaling back of US interest rate expectations following dismal US jobs numbers a week ago. European stock markets fell more than 2 percent, fuelling demand for bonds. Ten-year yields in Germany, Japan, Switzerland and the UK all struck record lows on Friday, while US Treasury yields hit their lowest level in more than three months.
German Bund yields - the benchmark for borrowing costs across the euro zone - have fallen almost 10 basis points in little over a week to as low as 0.010 percent. German 30-year yields are down about 20 basis points in the past week, falling to 0.57 percent on Friday. "Ten-year Bund yields could be negative very soon," said Ciaran O'Hagan, strategist at Societe Generale.
Adjusted for inflation, which is at 0.1 percent in Germany, 10-year yields are marginally negative at minus 0.08 percent. German bonds with a maturity out to nine years already have a yield below zero, which means investors are willing to pay to hold them instead of being paid. Both the European Central Bank and Bank of Japan have taken official interest rates into negative territory, helping send a wave of government bond yields below zero. According to the Fitch Ratings agency, just over $10 trillion of sovereign bonds globally had yields below zero in May. The ECB added to the mix this week by starting to buy corporate bonds as part of its asset purchase scheme.
German bond yields out to five years are below the ECB's minus 0.4 percent deposit rate, which means the bonds are ineligible for the central bank's bond-buying scheme. "Who would have thought that possible even a year ago, investors would pay governments to own their debt?" said Michael Hewson, chief market analyst at CMC Markets. In a tweet on Thursday, Janus Capital's Bill Gross warned the pile of negative-yielding bonds was a "supernova that will explode one day".
Even a small rise in yields could hurt investors. When Bund yields fell to 0.05 percent in April 2015, a blip in inflation sparked a jump to just over 1 percent by mid-June in one of the biggest Bund routs in history. Other analysts say there are valid reasons for the renewed fall in yields. Naeem Aslam, chief market analyst at Think Forex, said that while investors were wary, with Bund yields so close to negative territory, "they are still ready and interested to go with it". Worries about global growth also weighed on inflation expectations. The five-year, five-year breakeven forward, the ECB's favoured gauge of long-term inflation expectations, fell below 1.40 percent to its lowest since March.
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