Germany saw its benchmark 10-year bond yield fall to record lows today, crumbling more than three basis points to minus 0.209 percent – a level not seen since a previous record low hit in July 2016 shortly after the Brexit referendum. French long-dated bond yields fell to their lowest since 2016 at just 0.22 percent and Spanish and Portuguese yields kept record lows in sight. Greece’s 10-year bond yield fell below 3.0 percent for the first time. Ralf Preusser, global credit chief for Bank of America, said bond markets are concerned over European Central Bank and its ability to meet inflation targets.
President Mario Draghi is due to stand down, with calls rising for his successor to get a grip on rates.
Inflation was forecast at 1.3 percent for 2019, 1.5 percent for 2020 and 1.6 percent in 2021 – missing the ECB target of two percent.
Persistently low inflation across the developed world has prompted a debate about central bank policy and the effectiveness of inflation-targeting.
Mr Preusser said: “The sequencing of events means that things may have to get worse first.
“The ECB has engineered deflation.”
The fall in bond yields came after President Donald Trump announced he was slapping a tariff on Mexico on all goods coming into the US.
President Trump said the tariff would start at five percent on 10 June, 2019, and would steadily increase until an “illegal immigration problem is remedied”.
In a statement issued by the White House, President Trump said the tariff would increase to 10 percent on July 1.
It will then rise to 15 percent on August 1, 20 percent on September 1 and to 25 percent on October 1.
Rishi Mishra, interest rates strategist at Futures First Info Services, said: “Bund yields are at historic lows even as there are no real rate cuts priced in the euro area.
“It’s either the biggest mispricing of the century, or Bund yields are headed below minus 50 bps.”
Policymaker Olli Rehn said the ECB is ready to reintroduce monetary support measures if required and options would be discussed at a policy meeting next week.
Mr Rehn said, blaming the US-China trade war for weakening confidence: “We now have a soft patch in the economy and we are analsing whether this is a genuine soft patch or a more of a long lasting economic slowdown.
“If things turn south and we face a recession we are ready to use all instruments.”
While a eurozone recession was not currently the central scenario, an ample degree of policy stimulus remained appropriate, Mr Rehn said.