LONDON: German Bund yields fell near record lows on Tuesday, recording a fifth consecutive quarterly fall, a trend that has tracked declines in euro zone inflation.
Consumer prices in the currency union dipped 0.1 percent on the year in March, compared with a 0.3 percent drop in February and a 0.6 percent fall in January. The figures suggest inflation has bottomed out and could start rising again soon.
The European Central Bank launched a 1 trillion euro asset buying programme this month to revive inflation. That gave government borrowing costs an extra kick lower, and financial markets still expect inflation to remain below the ECB's target of just below 2 percent for the foreseeable future.
The most closely watched measure of the market's inflation expectations - the five-year, five-year forward breakeven rate measuring where markets expect 2025 inflation forecasts to be in 2020 - stood just above 1.60 percent.
"The longer-term outlook remains subdued, which will keep the European Central Bank aggressive and continue to put pressure on yields in the coming quarter," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
German 10-year Bund yields, which set the standard for euro zone borrowing costs, dipped 2 basis points on the day to 0.19 percent, not far from their record low of 0.165 percent hit this month. German bonds with maturities of up to seven years carry negative yields.
Inflation in the euro zone has been broadly falling for 2-1/2 years, but faced a sharp drop towards the end of 2013.
But some strategists reckon that markets may be underestimating the ability of the ECB's scheme to revive growth inflation, and that yields will rise in the coming quarter.
"There is scope for greater optimism on the efficacy of ECB QE to see core yields rise even as the ECB purchases in an environment of very limited supply," said Rabobank's Richard McGuire, predicting 10-year German bond yields to rise to 0.30 percent by the end of Q2.
Lower-rated Spanish and Italian 10-year yields were 7 basis points lower at 1.25 percent and 1.28 percent, respectively.
The two markets battered by the euro zone debt crisis in 2011-2012 have held their own despite renewed worries about Greece as negotiations with creditors drag on.
A survey of individuals and investors registered with consultancy firm Sentix found that 36.8 percent of respondents expected Athens to leave the currency union - marginally down from 37.1 percent in the previous month.
But the Sentix Contagion Risk index - which measures the probability that more than one country leaves the euro in the event of a breakup - fell to an all-time low of 27.5 percent.
"We assume that even a Grexit would only cause temporary distortions on the European financial markets," said Markus Allenspach, head of fixed income research at Julius Baer.
Greek 10-year bond yields rose 56 bps to 11.71 percent.
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