German bond rates go negative

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The rate of return on one-year German bonds pushed into negative territory on Wednesday for the first time since the creation of the euro as investors reacted to a possible interest rate cut.

"This morning there were rumours that the ECB could lower its rates much more than the market had been anticipating," explained BNP Paribas analyst Patrick Jacq.

On low turnover in the market, investors seeking to snap up safe haven German bonds pushed the yield on one-year notes into negative territory on the secondary market.

Around 1330 GMT the rate of return on one-year German bonds was -0.34 percent, against 0.84 percent at the close of trading on Tuesday, having gone down as far as -0.68 percent.

That signifies that an investor has paid more than what the German state has promised to pay when the bond expires on the expectation another investor will be ready to pay even more in several weeks if the European Central Bank lowers rates dramatically.

German bonds have been trading at below the inflation rate for some time, meaning in effect investors are paying the German state to hold their money safe.

Investors are increasingly betting that the ECB will lower rates significantly when its policymaking council meets next week given the delicate situation in the eurozone.

At is last meeting on November 3 the ECB surprised markets by lowering its main rate by 0.25 percent points to 1.25 percent.

© 2011 AFP

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