LONDON: Germany's 10-year bond yield fell towards record lows on Thursday, with a firm tone in the U.S. Treasury market keeping Bund yields close to zero.
A strong auction of 10-year U.S. bonds on Wednesday gave the Treasury market a boost, helping send 10-year U.S. yields to 1.675 percent early on Thursday - their lowest level since February.
That helped underpin German bond yields, which have been creeping closer towards zero this week against a backdrop of Brexit jitters and hefty European Central Bank monetary stimulus.
The 10-year German Bund yield, the benchmark for borrowing costs in the euro area, fell 1.3 basis points at 0.043 percent and was close to Wednesday's record low at 0.035 percent .
An attempt to break through zero into negative territory may well be on the cards, say analysts, adding that uncertainty ahead of the June 23 referendum on Britain's membership of the European Union could provide the trigger for such a move.
"Zero is very close now and I think the market wants to see if that level can be broken," said DZ Bank strategist Christian Lenk.
Lenk said he thought Brexit jitters could drive Bund yields a tad below zero in the near term but expected yields to head higher during the second half of the year.
Commerzbank also said a test of the zero mark was looming.
German bonds with a maturity out to nine years have a negative yield, while the average yield of German government bonds in circulation turned negative this week for the first time.
The ECB's $1.7 trillion euro quantitative easing programme has underpinned demand for German bonds, driving yields lower.
Last week, the central bank reiterated its dovish stance and said it expected inflation to remain below its near 2 percent target out to 2018.
Its favoured gauge of long-term inflation expectations, the five-year, five-year breakeven forward, on Wednesday fell below 1.43 percent to its lowest level in six weeks.
Speaking in Brussels early on Thursday, ECB President Mario Draghi said the ECB does not let inflation undershoot the central bank's objective for longer than is avoidable.
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