For the first time in two and a half years, the yield on benchmark German government bonds fell below zero.
Investors have been paying more to park their money in the safest assets, like the 10-year German bond. This bids up bond prices, and pushes down yields. When yields turn negative, investors who hold those bonds to maturity are guaranteed to make a loss. Put another way, borrowers are being paid to issue debt, because they pay back less than the face value on the loans.
Shorter-dated German bonds had been negative for a while, but below-zero yields for longer maturities stands out, especially as the 10-year German bond serves as the benchmark for all European debt. The yield on the 10-year closed at -0.02%.
What’s going on? It’s more evidence that the global economy is slowing down. When interest rates drift towards zero—or beyond—investors are betting that central banks will reduce interest rates or make other stimulus measures to prop up economic growth.
Earlier this month, the European Central Bank confirmed it wouldn’t raise interest rates for the rest of the year, and also announced a new set of cheap bank loans to try and boost lending. This week, the US Federal Reserve signaled that it wouldn’t raise rates for the rest of the year, a U-turn from its previous path of steady hikes. Surveys of corporate purchasing managers in Europe and the US suggest economic activity is slowing. Nerves about the global economy have also spread into the stock market, with European and US indexes all posting losses in trading today.
And that’s not the only worrying sign coming from the bond market. The US yield curve has inverted, meaning that yields on short-dated three-month bills are higher than those on 10-year Treasury bonds, for the first time since 2007. This inversion, if it persists, has almost always preceded a recession, though it can take more than a year for it to happen.