UPDATE 2-As growth fears mount, German Bund yield lurches towards zero percent
The 10-year Bund yield fell as low as 0.097 percent , dragging French and Dutch yields to their lowest levels in more than two years . Those falls reflect a significant adjustment in investor expectations for future growth and central bank policy, sparked on Thursday by sharp cuts to the European Commission's economic growth forecasts for the euro area.
"I think going sub-zero in the 10-year Bund yield would require a pricing in of rate cuts for the ECB (European Central bank) and the threshold for that is still sizeable," said Nordea chief analyst Jan von Gerich. "But it does show how the pricing of the economic outlook has deteriorated significantly and shows that the ECB won't be able to hike rates anytime soon."
Concern that economic conditions may be worse than anticipated a few months ago has driven yields on safer bonds down. For euro zone benchmark issuer Germany, that means bonds with maturities out to nine years now yield below zero percent. Three months ago, German bonds out to six years had sub-zero yields.
"We don't think a move to zero percent (on the 10-year Bund) is likely but it could happen," said Ciaran O'Hagan, rates strategist at Societe Generale, referring to Bund yields. Deutsche Bank strategist Jim Reid noted that the last time German bond yields were this low, the ECB's hefty bond-buying stimulus was in full flow.
"The last time (French) OAT yields were lower was November 2016 and Dutch yields were last lower also in October 2016, so this isn't just a Bund story," he said. This week has seen sharp falls in yields across most major bond markets.
British gilt yields hit eight-month lows on Thursday after the Bank of England cuts its growth estimates, Japanese 10-year bond yields on Friday fell to a five-week low and U.S. Treasury yields are down 5 basis points this week in a third week of falls. A key long-term gauge of market euro zone rate expectations meanwhile fell further on Friday to just above 1.45 percent, reflecting an increasingly subdued inflation outlook.
The five-year, five-year breakeven forward, which measures expected inflation over a five-year period that begins five years from today, is down 13 bps in the past month to its lowest level in over two years. It is tracked closely by the ECB, which targets inflation at close to 2 percent.
One euro zone outlier is Italy, whose bond market has taken a beating on concern that a weakening economy will exacerbate the country's budget deficit. Italian 10-year bond yields are up 23 bps this week -- set for their biggest one-week jump since October. (Reporting by Dhara Ranasinghe Editing by Toby Chopra and John Stonestreet)
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