German 10-year bund yield drops to another record low of -0.407 so far today. More importantly, it’s now below ECB’s -0.40% deposit rate for the first time ever. The steep decline is interpreted as a clear sign that markets are expecting further rate cut by the central bank.
Firstly, ECB President Mario Draghi has already set the easing course last month, even though he’s on the way out later this year. Secondly, the nomination of current IMF Managing Director Christine Lagarde is seen as a node to further easing.
Such expectation is further affirmed by explicitly dovish comments from Governing Council member Olli Rehn. He told German newspaper Boersen Zeitung that “if we really want to live up to our mandate, further monetary stimulus is now needed until there is improvement in economic and inflation prospects”.
“We should no longer see the recent slowdown in growth as a brief temporary dip in the economy, as a ‘soft patch’, Rehn added. “We are experiencing a longer phase of weaker growth.” Also, what is also of great concern to us now are inflation expectations,” Rehn said. “Market-based inflation expectations have fallen sharply and remain far too low.”
