(Bloomberg) -- The yields on Europe’s safest bonds have fallen below the European Central Bank’s deposit rate for the first time as investors bet on policy easing.
German 10-year yields slid below the minus 0.40% rate that the central bank pays on money parked with it. That is spurring investors to turn to riskier assets, such as Italian and Greek notes that are leading a rally in European bonds this week. Governments are cashing in, with both Spain and France auctioning debt at record-low borrowing costs on Thursday.
The move to more deeply negative yields supports the view that Europe may be following in the footsteps of Japan’s troubles to revive low inflation and growth. Analysts predict yields will keep falling on the conviction that Christine Lagarde, who is set to succeed Mario Draghi as European Central Bank president, will increase stimulus either through rate cuts or quantitative easing.
“The markets are really saying we expect more from the ECB,” Marilyn Watson, head of global fundamental fixed-income strategy at BlackRock Inc (NYSE:BLK)., told Bloomberg TV. “We expect yields to go lower still.”
Ten-year German yields have fallen eight basis points this week to a record-low minus 0.41%. Italian bonds have outpaced the bund rally to narrow the spread between the two to below 200 basis points this week, the lowest since May 2018.
Ten-year securities in Belgium, France and the Netherlands have already joined the sub-zero club, adding to a record global pile of negative-yielding debt. In the U.K., 10-year yields also fell below the Bank of England’s interest rate this week for the first time since the global financial crisis. And in the U.S., 30-year Treasury yields fell below the top of the Federal Reserve’s target range Wednesday.
The ECB can currently buy bonds that yield less than the deposit rate, though priority is given to those that still offer a premium. In Germany, there are scant securities left in that category with 20-year yields also turning negative this week, although Draghi has hinted the ECB could tweak rules on the level of debt the institution can hold.
Bond markets may be relieved that German Bundesbank President Jens Weidman didn’t get the ECB job, given his previous opposition to QE, said Mark Holman, chief executive officer at TwentyFour Asset Management. Instead Lagarde, who was an early proponent of QE for the euro zone, has the political nous to do well, he said.
“Our sense is that she will continue to err on the side of caution, which is what markets would like,” Holman said.