The European Central Bank meets later this week against a backdrop of sharply lower government bond yields that raising pressure on the ECB to address a scarcity of bonds for its 1.7 trillion euro stimulus programme.
About 55 percent of the German bonds on the ECB's shopping list are ineligible for its asset-purchase programme because they yield less than the deposit rate, according to Swiss wealth manager Pictet. That is up from 38 percent on June 2, when the ECB's Governing Council last met to discuss monetary policy.
Britain's vote to leave the European Union, a potential shock to world growth, has accelerated a fall in bond yields globally and puts the onus on central banks to shore up their economies in the face of Brexit.
Most analysts do not expect the ECB to ease monetary policy at Thursday's meeting, but rather to wait until September when its next set of economic forecasts are due for release.
Money markets price in less than a 20 percent chance of a 10 basis point rate cut this week; the Bank of England's decision last week to leave rates unchanged at its first post-Brexit meeting eased expectations of imminent ECB action.
Still, the ECB is expected to maintain a dovish tone and could tweak the parameters of its bond-buying scheme to address a scarcity issue in countries such as Ireland and Portugal as well as Germany - the euro zone's benchmark issuer where the bulk of purchases are made.
"The ECB probably won't add to monetary stimulus this week, but it could certainly make tweaks because there's now a more pressing case to address bond scarcity," said Commerzbank rates strategist Rainer Guntermann.
The ECB could also scrap a rule barring it from buying more than 33 percent of any bond, so long as it does not have a Collective Action Clause (CAC). Where there is a CAC, the ECB sets a limit of 25 percent, to avoid the risk of being a block to any debt restructuring.
German bond yields on Friday notched up their biggest weekly rise since last December as risk appetite bounced back from the Brexit shock.
Nevertheless, yields across the eurozone remain well below pre-Brexit levels. Ten-year yields fell two basis points on Monday to minus 0.08 percent, within sight of a recent record low of minus 0.20 percent.
All other euro zone yields fell lower on Monday, except for those in Spain which rose slightly after the government hired a group of banks to sell a new 10-year bond via syndication in the near future.
ABN AMRO estimates about 83 percent of the German bond market was trading in negative territory at the end of last week, up from around 75 percent in early June.
Italian 10-year yields have fallen almost 30 basis points in the past month - a move analysts say can partly be attributed to speculation the ECB could abandon its "capital key" to free up more bonds for quantitative easing, which is aimed at boosting growth and inflation in the euro area.
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