LONDON: German bond yields hit new lows on Friday as investors parked money in safe, top-rated debt as the shock of the Swiss National Bank scrapping its currency cap continued to wash over markets.
The 10-year benchmark dropped below 0.40 percent for the first time, while yields on U.S. Treasuries and UK Gilts also fell after the SNB stunned markets on Thursday by abandoning its pledge to keep the franc above 1.20 per euro.
Bond brokers said police raids against suspected militants in Belgium and a request from two Greek banks for emergency funding had also rattled investors, forcing them to take refuge in risk-free assets.
There was little sign of stress on low-rated euro zone government bonds, however, with analysts suggesting the Swiss move meant it was almost certain the European Central Bank would ease monetary conditions via quantitative easing next week.
"The SNB's shock decision... has triggered a wave of repricings," said Commerzbank analyst Markus Koch, adding that the uncertainty should remain positive for Bunds.
In the wake of the SNB's decision, yields on all Swiss government bonds out to nine-year maturities have fallen below zero. Analysts said this should also firm interest in Bunds and other top-rated bonds, as investors look to swap their Swiss bond holdings for higher-yielding alternatives.
Yields on 10-year Dutch, Finnish and Austrian bonds also fell to new record lows on Friday, as did Belgium and French equivalents after a brief sell-off on Thursday.
Market experts said the SNB has tended to buy "semi-core" French and Belgium bonds as part of an initiative to protect its currency cap, raising speculation that its demand for this debt would now waver.
Italian and Spanish yields also edged lower as bets firmed that the ECB was preparing to print money to start buying sovereign bonds next week. The view among traders was that the SNB abandoned its currency cap because it could not hold out against the tide of money coming its way from the ECB stimulus.
Italian 10-year yields were down 2 bps at 1.72 percent, while Spain's were 1 bps lower at 1.57 percent.
A Reuters poll of economists on Thursday showed there was a 90 percent chance the ECB conducts QE, and a 70 percent chance it is delivered this month.
While the ECB won crucial backing for its plans to buy government bonds earlier this week from a top EU legal adviser, the head of Germany's central bank on Thursday stressed that any scheme will have legal limits.
Belgian police killed two men during raids on Thursday against a group that prosecutors said was about to launch attacks, a week after gunmen killed 17 people in Paris, fuelling fears across Europe of young Muslims returning radicalised from the Middle East.
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