For the first time in modern German history, the yield of the country's benchmark 10-year debt - also known as Bund - has fallen below zero percent as investors rush to safety ahead of Britain's Brexit referendum.
With the prospect of Britain leaving the European Union looming ever larger ahead of a referendum in 9 days, global investors are increasingly fleeing to safe havens such as German debt and the Japanese currency.
As a result, the yield on Germany's benchmark 10-year debt fell into negative territory for the first time in its history on Tuesday.
Falling yields are caused by high demand for the security, leading to rising prices and dwindling returns on the investment. Apart from fears about a possible Brexit, analysts also attributed the current rush to safety to concerns about the global economy and low inflation expectations in the eurozone.
"In times of increasing market uncertainty, investors are buying securities with the lowest risk of default," NordLB analyst Michael Schulz told the news agency Reuters, adding that German Bunds were definitely among them.
And VTB Capital economist Neil MacKinnon told AFP that the countdown to the Brexit referendum on June 23 was dominating the market agenda. "The referendum is too close to call and is creating understandable risk aversion in the markets."
Stocks slump further
Risk-averse investors on Tuesday sold off European shares for the fifth straight session, driving stock markets on the continent to their lowest in three month. The pan-European FTSEurofirst 300 index dropped one percent, while the broader STOXX Europe 600 index fell 1.1 percent in early trading.
As several opinion polls suggest that support for quitting the 28-member bloc was gaining momentum among British voters, Germany was preparing for increased market volatility, a top official with the German Finance Ministry said on Tuesday.
Jens Spahn, parliamentary state secretary in the ministry, told German broadcaster ARD that a "Leave" vote could trigger far greater volatility.
"It will be important to demonstrate stability," Spahn said, adding that it would be critical for Germany and the rest of the EU to demonstrate unity and a determination to continue as a bloc.
Spahn also said the ministry was bracing for a variety of scenarios, depending on the outcome of the referendum and the extent of the market reactions. A vote to leave the EU would mean that Britain would have to renegotiate trade agreements with the rest of Europe, and it would likely have to accept less preferable terms, Spahn said.
Pound slides as yen rises
The British pound was also affected by market jitters, slumping to a two-month low in trading in Asia on Tuesday, notably against the Japanese yen. The yen moved toward its strongest level since October 2014 as traders pushed into a currency seen as a safe bet in times of turmoil.
"Amid all of this, the yen continues to demonstrate its preeminent safe-haven characteristics," said Ray Attrill, co-head of currency strategy at National Australian Bank.
However, Japan's finance minister Taro Aso repeated a warning that officials were ready to step into currency markets to tame the rise of the yen because a strong currency was hurting growth and exports.
"Sudden and large changes [in forex rates] are not desirable... We will act firmly when necessary," Aso told reporters.
Financial market volatility is likely to increase in the days ahead as the US Federal Reserve (US Fed) is due to open a policy meeting on Tuesday, deciding on the future of US interest rates. Buoyed by a strong performance of the US economy in recent months, the Fed is weighing another rate hike, but may be holding back on the move so shortly before the British referendum.
uhe/jd (Reuters, dpa, AFP)