Talk of ECB rate tiering drives German 10-year yield deeply negative

LONDON: Germany's long-dated borrowing costs were on track for their biggest one-day fall since January 2, hitting 2-1/2-year lows below zero percent on Wednesday after the European Central Bank said it could further delay a rate rise if needed and look at measures to offset the impact of negative interest rates.

Bund yields were lifted briefly after Reuters reported that the ECB is looking at ways to cut the charges banks pay on their excess cash to offset the side-effects of sub-zero rates, but the move south gathered momentum once the United States came in, and as investors began to focus on the implication that deposit rate tiering may mean lower rates for longer.

The central bank is studying options, including a so-called tiered deposit rate, two sources told Reuters, which would alleviate pressure on banks from negative interest rates.

Euro zone banking stocks were last up 2.4 percent.

"We have quite remarkable moves in fixed income and it may be that on both sides of Atlantic expectations of easier policy is driving yields lower," said Richard Maguire, head of rates strategy at Rabobank.

Germany's 10-year bond yield was last down over seven basis points on the day to a low of -0.094 percent, just 12 bps away from the record lows hit in 2016. U.S. 10-year bond yields meanwhile were down almost five basis points on the day to 2.36 percent.

The expectation of more accommodative monetary policy worldwide prompted a strong rally in euro zone government bonds, putting French and Dutch government bond yields on track for their best month since January 2016.

Earlier in the day, comments from ECB chief Mario Draghi had also boosted talk that the ECB may be considering steps such as a tiering of interest rates to ease pressure on banks.

Addressing complaints from banks that negative rates are hurting bank lending, Draghi said the ECB would look at whether mitigating measures are needed but said that negative weak profits are not an automatic result of low rates.

"Certainly this headline has made an impact (on bank stocks). There is this story of tiering doing the rounds," said Giuseppe Sersale, strategist at Anthilia Capital in Milan.

Following the ECB sources story, money markets sharply cut back their expectations for a rise in euro zone interest rates next year.

Rabobank's Maguire said U.S. money markets are now pricing in at least one rate cut from the Federal Reserve this year.

In a sign that investors are moving further up the curve in search of some yield, 30-year German yields fell to 0.52 percent , also their lowest since late 2016.

French and Dutch 10-year bond yields hit 2-1/2-year lows  , Spain's 30-year bond yield fell to a one-year low at 2.19 percent.

Reflecting worries that the ECB will be unable to meet its near 2-percent inflation target, a key long-term gauge of euro zone inflation expectations fell to 1.33 percent -- down 6 bps on the day.