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German government bond yields go negative for first time


The interest rate on 10-year bonds issued by the German government has turned negative for the first time.

Fears about the global economy and a possible UK departure from the EU have prompted investors to pay to own “Bunds”.

Stock markets have suffered further falls, with the FTSE 100 in London sinking below 6,000 points for the first time since February.

Wall Street fell overnight, as did most markets in Asia, while gold rose 1.4%.

Returns on 10-year UK government bonds fell by a significant amount – 0.06 percentage points – to a record low of 1.146%.

The decline in yields, or returns, for government bonds reflects strong demand from investors for a safe place to park their money.

In the case of Germany, the yield has fallen to minus 0.028% – meaning investors are prepared to pay, rather than be paid, to own bonds.

Ulrich Kater, economist at DeKaBank, said: “A huge driving factor… is the heightened uncertainty over a possible Brexit, which is driving investors into the safe haven of German sovereign bonds. The drop in yields below the zero mark once again shows the immense challenges currently facing global financial markets.”

Something has tipped the yield on German government ten-year debt into negative territory. But it is still an extraordinary fact that it was anywhere near that to start with. It reflects the persistent failure of the eurozone to generate a really convincing recovery from the financial crisis.

That in turn led to the European Central Bank taking extraordinary steps that have kept the downward pressure on bond yields. It’s partly about the ECB’s ultra-low interest rate policy, which tends to drive down the returns on other interest paying assets.

But perhaps the big contributor is the ECB’s quantitative easing policy which involves buying bonds, including the German government’s. That tends to push the prices higher, and with a bond, the yield goes down when the price rises.

The yield on Germany’s bonds was always relatively low as it’s seen as a borrower that’s sure to repay. So, it’s to be expected that it would be the first in the eurozone whose ten-year bonds should go into the weird world of negative returns.

LBBW analyst Werner Bader added: “Fears that Britain will quit the EU has killed off any willingness to take risks.”

Sterling fell 0.8% against the dollar to $1.4161 as opinion polls showed mounting support for Brexit ahead of next week’s EU referendum.

Investors are betting sterling will fall, regardless of the outcome of the 23 June vote, with millions placed in the derivatives market, where traders can speculate in the future price of currencies.

James Ruddiman, director at currency broker Audere Solutions, said: “Expect some wild swings in the coming days, with $1.40 the next level to watch. I would expect greater degree of panic if the ‘leave’ margin widens in the coming days.”

Since the start of the year sterling is slightly down against the US dollar, falling from $1.47 to $1.42.

Luke Ellis, president of Man Group, the world’s largest listed hedge fund, told BBC Radio 4’s Today programme that most of the activity was by companies looking to protect themselves against a fall in the pound.

Few traders were prepared to call the outcome of the referendum, he added.