Bund yield nears zero on Grexit fears

Germany's benchmark 10-year borrowing costs are now than 10 basis points away from falling below zero as fears of a Greek exit from the euro intensify.

Yields on 10-year Bunds fell for the third consecutive day to a record low of 0.098 per cent on Thursday morning, while Greek 3-year bond yields soared about 400 basis points to 27.9 per cent, the highest level since 2012.

Demand for Germany's government debt has heightened this week following European Central Bank president Mario Draghi's reassertion of commitment to the purchase of €60bn of eurozone bonds a month until September 2016 under the ECB's quantitative easing programme, regardless of favourable economic indicators.

Yields on the benchmark 10-year Bund have dropped from 0.5 per cent to less than 0.1 per cent this year, leading strategists to rapidly rethink their forecasts. Royal Bank of Scotland has revised its target for 10 year German bond yields from 0.13 per cent to -0.13 per cent.

"How negative can 10-year yields go?" RBS asked in a research note published on Thursday. "The inflation process globally is fraught with risks, especially in Europe where expectations are already battered."

The bank said shock risks such as Greece were likely to be on the downside.

Across Europe the ECB's quantitative easing programme has driven up prices for sovereign bonds, with the exception of Greece.

Grexit fears have continued to rise on the back of Standard & Poor's decision to downgrade Greek debt to junk status, and warnings from Wolfgang Schauble, German finance minister, about the likelihood of a deal with Athens in a key meeting next week.

Philippe Gudin at Barclays said: "We believe that the probability of a Greek exit is higher now than it ever was, even if a no-default 'muddle-through' remains our baseline forecast for now."

Steven Barrow, currency strategist at Standard Bank, said improved economic data in the eurozone should ordinarily drive up yields.

"But nothing is 'ordinary' about the eurozone," said Mr Barrow. "For a start, there's over €1tn of QE coming down the track through to September 2016 and it seems abundantly clear from the fall in yields we've seen this year that the market is totally blinkered to everything but the ECB's QE.

"Hence it really does not matter if growth improves or inflation starts to rise; as long as the QE plan stays on track, yields are going to fall."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation