German two-year bond yields fell below minus 0.40 percent for the first time on Tuesday as investors sought top-rated assets after Turkish fighter jets shot down a Russian warplane near the Syrian border. The prospect of an escalation in tensions between Russia and Turkey, a Nato member, triggered a "flight to safety", in which investors shun risky assets in favour of short-dated government bonds, analysts said.
The overall move was small, reflecting caution rather than serious concern. But the "safety bid" was evident, with two-year yields falling even as money market rates held steady. Money market rates are influenced by expectations about European Central Bank policy moves rather than shifts in risk appetite. Bets that the ECB could announce more easing measures next week have pushed both short-term bond yields and money market rates to new record lows in recent days. The measures could include a cut in the deposit rate and additional bond buying stimulus.
German two-year yields last traded 1 basis point lower on the day at minus 0.39 percent, after an initial reaction to the headlines from Turkey pushed them as low as minus 0.401 percent - a new record. "Russia is a harder animal to call in terms of reactions to these things," said Alan McQuaid, chief economist at Merrion Stockbrokers. Ten-year German Bund yields fell 4 basis below 0.50 percent. US 10-year T-note yields hit their lowest in three weeks at 2.21 percent.
Money market rates price in a cut of at least 10 basis points in the deposit rate to -0.30 percent in December and a further 10 basis point cut within a year. The five-year, five-year breakeven forward, which shows where markets expect 2025 inflation forecasts to be in 2020, last traded at 1.72 percent, a significant pick-up from September's lows of 1.56 percent but still below levels of 1.8 percent hit earlier this month.