German 10-year bond yields

[Michael Grove]

 ... have fallen below zero for the time in history as Brexit fears send

 investors scurrying into safe-havens, and Europe slides deeper into the

 psychological trap of deflation. The eurozone is rapidly running out of

 AAA and AA-rated sovereign bonds for sale as the European Central Bank

 mops up the debt market under its quantitative easing programme, leaving

 pension funds and insurers desperately short of assets needed to match

 liabilities. Yields tumbled across the eurozone’s core states and the Nordic

 bloc, briefly touching minus 0.006pc in Germany.  Two thirds of the entire

 stock of German government debt is now trading at negative rates.

 The pattern is all too familiar to economists in Japan, where bond yields

 have been sliding for a quarter of a century and are still falling, reaching

 -0.19pc on ten-year maturities this week. The proverbial graveyard is

 full of traders that tried to bet against this trend, misjudging the

 deeper forces at work. Burned by hard experience, Japanese investors

 have been among the biggest buyers of Bunds and core-EMU bonds.

 “When nobody else was long, they were buying by the bucket load,”

 said one trader. Ominously, the yields of high-debt states on the eurozone

 periphery have ratcheting up over recent days, as have Polish and Balkan

 yields, a warning sign of where stress may lies if Britain votes to leave the

 EU next week.

 Polls showing the Leave campaign pulling ahead have astonished investors

 overseas, and even in the City of London where the financial subculture is

 like a foreign country. “It is Brexit that has lit a fire under this,” said

 Mark Dowding from Blue Bay. 

 “There has been this deep-seated complacency among investors –  

 almost arrogance – that the British would come to their senses, see

 reason, and go along with the status quo. Now they realise that it is

 on a knife-edge. The question they are asking is whether Brexit is the

 end of the European Union. They fear that it could be a Black Swan

 event for financial markets” he said.

 The sudden shift in the referendum landscape has caught traders off guard

 with a large short position on the bond market, many taking out complex

 options contracts that have gone horribly wrong.

 “There is a big short-squeeze going on. They just didn’t think yields

 could fall any further,” said Marc Ostwald, a bond veteran at ADM.
  

                                                             Ambrose Evans-Pritchard - The Telegraph 

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