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Benchmark 10-year German government borrowing costs have never been lower, and while the prospect of them dwindling to zero and even below is highly unlikely, it is no longer inconceivable.
Slowing economic growth and a seemingly relentless decline in inflation across the euro zone, including Germany, has spurred buying of Bunds, meaning Berlin can now borrow for 10 years at less than 1 percent compared with 2 percent at the start of the year.
Expectations the European Central Bank will eventually succumb to quantitative easing (QE) -- buying large amounts of bonds to pump money into the currency union's limping economy -- have pushed up demand from investors even as yields have dipped.
In a landmark speech on Friday, ECB President Mario Draghi highlighted a "significant" fall in euro zone inflation expectations this month, dropping his strongest hint yet that a QE programme is possible over the next year.
This has strengthened already pertinent comparisons with Switzerland and Japan, which have battled deflation and experienced ultra-low yields for prolonged periods recently --raising the question: Just how low can the Bund yield go?
Chief Citi rates strategist Alessandro Tentori and his team last week slashed their 10-year Bund yield forecast to 0.75 percent at the end of the year, from last month's prediction of 1.45 percent.
"There's no impediment for yields going even lower," Tentori said. "It's technically conceivable to have a 10-year rate at zero or below zero, but the scenarios that underlie that would be extreme."
Source
Slowing economic growth and a seemingly relentless decline in inflation across the euro zone, including Germany, has spurred buying of Bunds, meaning Berlin can now borrow for 10 years at less than 1 percent compared with 2 percent at the start of the year.
Expectations the European Central Bank will eventually succumb to quantitative easing (QE) -- buying large amounts of bonds to pump money into the currency union's limping economy -- have pushed up demand from investors even as yields have dipped.
In a landmark speech on Friday, ECB President Mario Draghi highlighted a "significant" fall in euro zone inflation expectations this month, dropping his strongest hint yet that a QE programme is possible over the next year.
This has strengthened already pertinent comparisons with Switzerland and Japan, which have battled deflation and experienced ultra-low yields for prolonged periods recently --raising the question: Just how low can the Bund yield go?
Chief Citi rates strategist Alessandro Tentori and his team last week slashed their 10-year Bund yield forecast to 0.75 percent at the end of the year, from last month's prediction of 1.45 percent.
"There's no impediment for yields going even lower," Tentori said. "It's technically conceivable to have a 10-year rate at zero or below zero, but the scenarios that underlie that would be extreme."
Source
