Why is the German 10-year bond yield below the ECB rate and how is it impacting banks?

[Grace A]

[Ignatius Bose]

Germany’s benchmark 10-year bond yield dropped below the European Central Bank’s deposit rate on Thursday, signalling that markets are bracing for some more easing by the central bank. The yield on the German bund dived to -0.409%, tumbling over 65 basis points this year to slip below the ECB’s deposit rate of -0.40% for the first time in history on mounting expectations that the ECB will slash rates in a bid to support economic growth and falling inflation in the Eurozone. German bonds are triple-A rated and are used as collateral by banks. With growing demand and a supply squeeze, the downward pressure on this benchmark debt instrument is pushing the yield lower. At the current rate, the cost of holding longer duration German government bonds by banks is higher than depositing cash at the central bank, which only banks have access to. However, with a massive shortfall of AAA-rated assets and the ECB’s deposit rate at -0.40% since March 2016, it wouldn’t be long before we see another rate cut by the European Central Bank.