Trend towards low yields shows no sign of slowing down

When your bank starts charging you to save and pays you to borrow it's a sure sign that something has gone awry. Denmark, home of the negative deposit rate, is watching its domestic financial services turn into a hall of mirrors where lenders offer sub-zero interest rates on loans and warn savers they will be charged on deposits.

Where Danish banks lead others may follow. Debt markets have fallen down the rabbit hole this year. Yields on government debt are now so low that some investors are buying bonds on which they will lose money if they hold to maturity. On Tuesday, that trend showed no signs of slowing down.

Fresh concerns about Greece's threat of default pushed investors to seek the security of the eurozone's core government bond markets, sending Germany's benchmark 10-year bond yield down to a record low of 0.13 per cent.

As officials in Athens returned from celebrating Greek Orthodox Easter to field questions about their plans to make debt payments, prices in the domestic bond market dropped and yields rose, although it should be noted that they are well below the heights scaled during the eurozone debt crisis.

In Europe's southern periphery, where countries were hit hardest by the crisis, prices for bonds dipped, but it seems as if the force of the European Central Bank's pledge to pump more than a trillion euros into the sagging economy via sovereign debt purchases is helping to soothe anxieties of knock-on effects from Greece and keep yields low.

In total, $2.42tn of the world's government bonds trade at negative yields, according to figures from JPMorgan. The options for investors who want to avoid them boil down to moving into riskier assets.

The alternative is to settle in and get comfortable in the belief that until the ECB's bond buying programme comes to an end next year or central banks in the US and UK raise rates, ultra-low bond yields will remain on a roll.

Marie Diron at credit rating agency Moody's points out that governments in Europe have not significantly ramped up their borrowing plans in spite of record low yields on their debt, indicating some may expect their borrowing rates to keep on falling. Investors may want to take heed.

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