"There's general disbelief that the ECB's policies can reflate the euro-zone economy and achieve sustainable growth momentum," Lena Komileva, chief economist at G Plus Economics in London, said in an interview with Mark Barton, Caroline Hyde and Manus Cranny on Bloomberg Television's Countdown program. "The road to a sub-1 per cent 10-year bund yield is wide open."
Benchmark 10-year yields were little changed at 1.06 per cent as of 11:42 a.m. London time after dropping to a record 1.023 per cent on August 8.
The price of the 1.5 per cent bund due in May 2024 was 104.045 per cent of face value. Two-year notes yielded minus 0.006 per cent, the least since May 23, 2013.
A negative yield means investors who hold a security until it matures will receive less than they paid to buy it.
Reluctant ECB
Reluctance on the part of ECB officials, led by President Mario Draghi, to adopt full-scale quantitative-easing policies that have been pursued by counterparts in the Federal Reserve, Bank of England and Bank of Japan is prompting comparisons with Japan's stagnation over the past 15 years.
The deflation threat still haunts Japan and the nation's central bank has been buying about 7 trillion yen ($69 billion) of sovereign bonds a month in a program that started in April 2013.
"In the absence of almost any, let alone vigorous, growth and the ECB voluntarily sticking to (no) plan of zero rates for several years rather than overdue large scale asset purchases, then yield curve Japanification is set to continue," Royal Bank of Scotland Group Plc analysts including Andrew Roberts, head of European rates strategy in London, wrote in an emailed note on Tuesday.
"Bunds are not expensive at 1 per cent if growth momentum is slowing," the analysts wrote.
A yield curve is a chart showing rates on bonds of different maturities.
Turning Japanese
Japan's 10-year government bond yielded 0.51 per cent on Tuesday. The rate reached an all-time low 0.315 per cent in April 2013 and hasn't been above 2 per cent since May 2006. The average over the past 15 years is 1.29 per cent. That compares with an average rate of 3.55 per cent for the German bund over the same period.
The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, dropped to 8.6 in August from 27.1 in July. Economists forecast a decrease to 17, according to the median estimate in a Bloomberg News survey.
Inflation slows
Euro-area inflation unexpectedly slowed to 0.4 per cent in July, the weakest since October 2009, a report from the European Union's statistics office showed last month, underscoring the challenge faced by the ECB as it seeks to rekindle price growth. For the past 10 months the inflation rate has been weaker than 1 per cent, less than half the ECB's goal, while joblessness has remained near an all-time high.
Germany's 10-year break-even rate, a gauge of the consumer-price outlook derived from the yield difference between regular and index-linked bonds, was at 1.19 percentage point on Tuesday, the lowest on a closing-price basis since at least 2009, according to data compiled by Bloomberg.
Germany is scheduled to auction 4 billion euros ($5.3 billion) of 10-year bunds on Tuesday. The nation last sold the debt on July 16 at a record-low average yield of 1.20 percent.
Spain's 10-year yield dropped five basis points, or 0.05 percentage point, to 2.61 percent on Tuesday. The rate on equivalent Italian bonds fell three basis points to 2.75 per cent.
Bloomberg World Bond Indexes show German securities returned 6.3 per cent this year through Monday. That compares with an 11 per cent gain for Spain's, 9.8 per cent for Italy's and 3.9 per cent for Treasuries.
- Bloomberg
