LONDON: Top-rated euro zone bond yields plumbed record lows on Tuesday as anxiety over Greece's future in the euro zone and concerns about the implications for global growth of slumping oil prices drove demand for assets perceived as safe.
Greek anti-austerity party Syriza, leading polls ahead of a snap election on Jan. 25, has pledged to renegotiate the terms of the country's 240 billion euro international bailout.
A report at the weekend said the German government believes the euro zone could cope with a Greek exit, fuelling uncertainty about the future of the single currency bloc.
This, added to growth worries as oil prices tumbled to 5-1/2-year lows, spurred investors into high-rated government bonds, and the average of yields on German, U.S. and Japanese 10-year debt dropped below 1 percent for the first time.
Yields on German Bunds, the benchmark for euro zone borrowing costs, fell to an all-time low of 0.484 percent while U.S. 10-year yields dipped below 2 percent for the first time since mid-October.
French, Dutch, Austrian, Belgian and Finnish yields also hit record lows. There was no trading in Greek assets on Tuesday due to a public holiday.
"Until we see results from the (Greek) elections there will be a lot of uncertainty ... and that will continue helping demand for higher-quality assets," said Christian Lenk, a strategist at DZ Bank.
"The other factor helping quality assets to gain more ground is the ongoing decline in oil prices ... It's not clear what this massive move really means. Is it merely because of a supply glut or is it an indication of the world economy taking a dive in 2015?"
QE OPTIONS
The rout in oil prices, which have fallen by more than half since August, is driving fears about deflation in the euro zone.
Inflation in the currency bloc is predicted to turn negative for the first time since 2009 when preliminary December data come out on Wednesday after German inflation fell to just 0.1 percent, piling pressure on the European Central Bank to launch more monetary stimulus.
Activity surveys showing the euro zone economy ended 2014 with its worst quarter for over a year fuelled speculation that the ECB will soon begin fully-fledged money printing, a process known as quantitative easing (QE).
Some analysts believe the ECB will announce QE at its Jan. 22 policy meeting though others reckon debate among policymakers on its shape and form could result in a less radical scheme. Dutch newspaper Het Financieele Dagblad said on Tuesday the ECB is considering three possible options for QE.
Spanish and Italian 10-year yields also dipped on the day to 1.56 percent and 1.79 percent respectively, with the prospect of ECB stimulus limiting fallout from Greece.
"We stay long investment grade and long-dated bonds, intruding Italy and Spain, on QE," RBS strategists said in a note. "But we think assets and countries which require growth to perform, like Greece and Portugal ... will continue to get hurt."
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