German bond yields hit new sub-zero depths

How low can you go? No but seriously, how low?

German two-year debt yields have dropped even deeper into negative territory, touching new record lows as expectations build that the European Central Bank will unveil further easing measures, writes Joel Lewin.

The two-year yield has shed another 2.5 basis points (0.025 percentage points) today, touching a new low of minus 0.57 per cent. Yields fall when prices rise. At negative yields, new buyers are guaranteed a nominal loss, and are effectively paying for the safekeeping of their funds.

The ECB stipulates that it can’t currently buy anything yielding less than its deposit rate, which minus 0.3 per cent. Frederik Ducrozet at Pictet says 50 per cent of German debt is no longer eligible for the ECB’s QE programme.

Meanwhile the 10-year yield has dropped 4bps to a 10-month low of 0.109 per cent, and is on track for its largest quarterly drop since 2011.

Data published this morning showed the eurozone slipped back into deflation in February, with consumer prices contracting 0.2 per cent, after rising 0.3 per cent in January.

Capital Economics said:

intensifies the pressure on the ECB to announce a decisive increase in its policy support after it meets next week

And on Friday, data showed Germany also fell back into deflation in February.

Consumer prices fell 0.2 per cent year-on-year in February on an EU harmonised basis, a steep drop from the 0.4 per cent rise in January, and well below economists’ forecasts of no change. That’s only the third month of deflation Germany has experience in the last six years, and the seventh in the last two decades.

Chart courtesy of Bloomberg