World Economy

German Bund Falls Below Zero

German Bund Falls Below ZeroGerman Bund Falls Below Zero

The rally for sovereign bonds has passed an important milestone, with the yield on Germany’s benchmark debt hitting zero and briefly entering negative territory.

The strong demand for sovereign debt is standing out in cautious trade ahead of a series of policy meetings at major central banks and amid rising concern at the prospect that the UK could vote to leave the EU in its June 23 referendum, western news reports said Tuesday.

The flight to safety helped Germany’s 10-year Bund yield hit zero, before entering negative territory at minus 0.001%. It then bounced back to trade down 2 basis points on the day at 0.002%.

Yields on Japanese government bonds ranging from 10 to 30 years at record lows, with the benchmark 10-year JGB yielding minus 0.17%.

European equities indices continued to fall. Germany’s Xetra Dax 30 is down 0.7%, in a broad-based sell-off, with only one of its constituents escaping the selling. London’s FTSE 100 is 0.6% weaker and back at levels last seen in February, with losses led by energy and financial stocks. The region-wide Euro Stoxx 600 is down 1.1%.

The Federal Reserve’s starts a run of policy calls with an announcement on Wednesday, followed by the Bank of Japan and Bank of England on Thursday.

  Pound Whipped

Although the Fed is expected to stay on hold, the overarching concern—that patches of softness in the US and global economy have resurfaced—is countering the boost that otherwise might be expected to accompany monetary policy staying accommodative for longer.

The pound is 0.7% weaker at $1.41, with the currency increasingly whipped around by opinion polls ahead of the vote.

Markets outside Europe are paying more attention to the potential risks around “Brexit”. Goldman Sachs said S&P 500 options suggest investors are beginning to price in such concerns, and that currency options “are pricing in sharply elevated volatility one month out, at levels not seen since the global financial crisis.

Japan’s Nikkei 225 is down 1%, a day after suffering its biggest one-day declines since February as the yen hit its strongest point against the dollar since May 3. Adding to the gloom, rating agency Fitch late on Monday lowered its outlook on Japan, citing doubt about the country’s commitment to fixing its public finances.

In Australia, the S&P/ASX 200 shed 1.9% as investors returned from a three-day weekend. Hong Kong’s Hang Seng and China’s Shanghai Composite are flat.

On Tuesday evening in New York, MSCI will reveal whether or not it will include Chinese A-shares in its emerging markets indices.