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Investors on edge as German 10-year bunds veer towards 0%

Yields on safe-haven German bunds headed towards 0 percent on Thursday, as investors sought shelter from diverging central bank policy around the world and the possibility of the U.K. exiting the European Union.

Benchmark 10-year bunds rose to yield just 0.026 percent — an historic low according to Reuters Tradeweb data, which goes back to 1992.

Symbol
Yield
 
Change
Bund 10-YR
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GER 20-YR
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GER 30-YR
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Traders are betting on if and when 10-year notes will fall into negative territory, just as bunds with durations of nine years or less have already done. The average yield on German bunds in circulation turned negative this week for the first time, according to Reuters.

"The yield (on 10-year bunds) remains so low that it wouldn't take much to turn it negative soon. Yet even if the yield did fall below zero, we are not convinced that it would remain there for long," Capital Economics said in a report on Thursday.

The U.K. economic-forecasting firm has cut its year-end forecast for 10-year bunds to 0.25 percent from 0.50 percent, to take account of the recent slide.

A strong auction of 10-year U.S. Treasury notes pushed U.S. yields lower early on Thursday and weighed on bunds too. Sovereign yields tumbled everywhere on Thursday, including for euro zone debt, U.K. gilts and Japanese bonds. Bunds may also have got a boost from a German goods trade report for April that came in above expectations.

Symbol
Yield
 
Change
US 3-MO
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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Meanwhile, European and Japanese stocks and U.S. stock-index futures fell early on Thursday and the U.S. dollar hit a one-month low against a basket of currencies.

This came amid growing speculation the U.S. Federal Reserve might raise interest rates either this month or next, while monetary policy remains ultra-loose at other major central banks.

South Korea's central bank cut its policy rate by 25 basis points to a record-low of 1.25 percent on Thursday. Plus, the European Central Bank launched its corporate bond-buying program on Wednesday.

"If you don't like the idea that Easy Money is a panacea for asset markets and think the Bank of Korea rate cut reflects the woes of an economy with excess savings, importing disinflation from both Japan and China and heading for economic stagnation, this might be a good time to find a rock to hide under for a while," Kit Juckes, strategist at Societe Generale, said in a note on Thursday.

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