German borrowing cost turn negative for the first ever time as investors rush to safety
The latest key milestone in the new low interest rate era was breached this morning.
After months of precipitous declines, yields on the German 10-year bund turned negative in the first few hours of today's trading, hitting minus 0.03 per cent, before settling at minus 0.02 per cent. That means investors are paying the German government to take their money off them for an entire decade.
Yields started the day at 0.02 per cent, but with tumbling stock markets, oil prices on the slide and weakness in sterling, that quickly fell by 0.05 percentage points – or five basis points – into negative territory.
"Sky high demand for fixed income has sent German 10-year bund yields negative for the first time in history. ‘Fixed income’ has taken another leap towards ‘fixed expenditure,'" said Jasper Lawler of CMC Markets.
Borrowing costs for the UK government also fell markedly this morning after sterling hit a fresh two-month low against the dollar. Yields on UK 10-year debt dropped by 0.06 percentage points to 1.14 per cent.
While the flight to safety explains some of the charge towards bonds – especially in the UK – the latest actions of the European Central Bank (ECB) have arguably been a bigger driving force in the journey towards negative yields in Germany.
Make that 50% of Bunds no longer eligible to ECB QE! (€400bn out of €810bn) pic.twitter.com/y8qP7fHk3c
— Frederik Ducrozet (@fwred) June 14, 2016
Three-quarters of all German government debt is now trading at a negative rate, analysts said, while around half pays interest of less than minus 0.4 per cent. For bonds to be eligible for purchase by the ECB they need to pay a yield of at least minus 0.4 per cent – the same as its own headline interest rate for bank deposits.