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German 10-year bond yield turns negative German government bonds go negative for first time
(about 2 hours later)
Yields on German 10-year government bonds have turned negative for the first time. The interest rate on 10-year bonds issued by the German government has turned negative for the first time.
The move is proof of investors' nervousness about the slowing global economy and the potential for turbulence if the UK leaves the EU. Fears about the global economy and a possible UK departure from the EU have prompted investors to pay to own "Bunds".
German sovereign bonds - IOUs issued by the Bundesbank - are regarded as some of the safest investments in the world. Stock markets have suffered further falls, with the FTSE 100 in London sinking below 6,000 points for the first time since February.
The negative yield shows investors are prepared to accept a guaranteed loss just to keep their money safe. Wall Street fell overnight, as did most markets in Asia, while gold rose 1.4%.
Like all government bonds, they come with a guaranteed interest rate payment, with the principal being given back at the end of their term - in this case 10 years. Returns on 10-year UK government bonds fell by a significant amount - 0.06 percentage points - to a record low of 1.146%.
Such has been the demand for these bonds, however, that the purchase price now wipes out the expected interest payments. The decline in yields, or returns, for government bonds reflects strong demand from investors for a safe place to park their money.
Analysts said there was widespread uncertainty in markets over the extent of China's slowdown, and a loss of faith in central banks' ability to return economies to growth. 'Immense challenges'
Since the 2008 financial crisis, central banks have slashed interest rates and poured billions into domestic businesses in an attempt to bring them back to life. In the case of Germany, the yield has fallen to minus 0.028% - meaning investors are prepared to pay, rather than be paid, to own bonds.
Investors are betting sterling will fall - regardless of the outcome of the 23 June vote - with millions placed in the derivatives market, where traders can speculate in the future price of currencies. Ulrich Kater, economist at DeKaBank, said: "A huge driving factor... is the heightened uncertainty over a possible Brexit, which is driving investors into the safe haven of German sovereign bonds. The drop in yields below the zero mark once again shows the immense challenges currently facing global financial markets."
But Luke Ellis, president of Man Group, the world's largest listed hedge fund, told the BBC's Today programme that most of the activity was by companies looking to protect themselves against a fall in the pound because of their exposure to the currency. LBBW analyst Werner Bader added: "Fears that Britain will quit the EU has killed off any willingness to take risks."
Few traders were prepared to call the outcome of the referendum, he said. Sterling fell 0.8% against the dollar to $1.4161 as opinion polls showed mounting support for Brexit ahead of next week's EU referendum.
Investors are betting sterling will fall, regardless of the outcome of the 23 June vote, with millions placed in the derivatives market, where traders can speculate in the future price of currencies.
James Ruddiman, director at currency broker Audere Solutions, said: "Expect some wild swings in the coming days, with $1.40 the next level to watch. I would expect greater degree of panic if the 'leave' margin widens in the coming days."
Since the start of the year sterling is slightly down against the US dollar, falling from $1.47 to $1.42.Since the start of the year sterling is slightly down against the US dollar, falling from $1.47 to $1.42.
Luke Ellis, president of Man Group, the world's largest listed hedge fund, told BBC Radio 4's Today programme that most of the activity was by companies looking to protect themselves against a fall in the pound.
Few traders were prepared to call the outcome of the referendum, he added.