Bund yields make history books – more lows to come?

Benchmark German Bunds made the history books this week when yields twice fell below 1 percent—and some analysts say the rally has further to run.

Bunds, which are viewed as a low-risk asset akin to U.S. Treasurys, have been rising since the beginning of this year, with investors nervous about deteriorating Western relations with Russia, stagnation in Europe and tightening of monetary policy in the U.K. and the U.S.

Bund 10-YR

Following disappointing growth data for the euro zone, 10-year yields finally broke through the 1 percent handle on Thursday—a first—dipping to an intraday low of 0.998 percent.

Yields then fell below 1 percent again on Friday, on reports that Ukrainian troops had attacked armed Russian military, which had crossed into the country near the border of Izvaryne. U.S. yields also declined, hitting a low of 2.333 percent, while the euro and European stocks turned negative.

Irrespective of further news from Ukraine, some analysts forecast Bunds could fall still lower if economic news from Europe remains weak.

"There is no reason why the 10-year and the 30-year in Germany cannot go lower, if we continue to get these kinds of figures, and if the conviction the market has, that Europe is heading for a Japan-like scenario (low growth and low inflation), continues to grow—and right now it is growing," Luca Jellinek, head of European rates strategy at Credit Agricole, told CNBC on Friday.

Other banks, including RBS and Commerzbank, also predict Bund yields may fall below 1 percent again in the near-future.

"Clearly the disappointing European GDP stats yesterday help but direction of the 10-year Bund yield has been pretty one-way this year," said Jim Reid of Deutsche Bank in a research note on Friday.

Over the longer-term, Capital Economics forecast Bund yields will likely be pushed higher by rising Treasury yields, as the Federal Reserve tightens more quickly than most envisage.

The macroeconomic research firm predicted other developed market bonds would be affected in the same way and singled out U.K. Gilts in particular.

"Gilts should not be immune to a tightening of monetary policy, both in the U.S. and at home," Capital Economics Economist John Higgins said in a research note on Friday.

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In the meantime, Jellinek recommended European bond investors stay out of Bunds and opt for higher-yielding debt from riskier countries like Italy and Spain. Yields for these countries have also been hitting record lows.

"I think the periphery is still interesting, although there will be a lot of noise around the figures –obviously, very low good growth is not good for the periphery," Jellinek told CNBC.

—By CNBC's Katy Barnato