Government yields below key rates

[archived_user]

How do peeps,
Was wondering if anyone would be able to explain the following gifs to me as it feels like the tectonic plates of finance are shifting;
1) EURO ZONE
The yield on Germany’s 10-year Bund fell below the ECB’s overnight deposit rate for the first time ever;
https://fingfx.thomsonreuters.com/gfx/mkt/12/2983/2958/ezcurve.gif
2) UNITED STATES
The 10-year Treasury yield falling below the upper bound of the Fed’s interest rate band for the first time in 11 years;
https://fingfx.thomsonreuters.com/gfx/mkt/12/2985/2960/us.gif
3) UNITED KINGDOM
The yield on the 10-year gilt falling below the Bank of England’s policy rate;
https://fingfx.thomsonreuters.com/gfx/mkt/12/2987/2962/UKcurve.gif
These have been sourced from a Reuters article called ’The Incredible Disappearing Bond Yields’.
Appreciate any insight.
Best,
Terry

 

[archived_user]

In a nutshell, investors are expecting low to negative growth around the world & maybe recession, esp in the eurozone where the economy has been slowing for a while now. You should know the basics about monetary policy…. when you expect the overnight cash rate to decline for the next X years, suddenly that government bond yielding %+ now looks attractive. Demand drives the price up and yield down. Thats when you see the yield curve flattening/inverting and also shifting downwards.

 

[archived_user]

Cheers for the response, even if it was from your high horse I am comfortable with monetary policy basics. I was wondering more about the significance of yields falling below policy/target rates. Do you think this shift makes it difficult for banks to be profitable going forward given how narrow spreads on rates are getting??
Cheers,
T

 

[archived_user]

The answer, generally, is yes. While borrowing and lending rates are both impacted by the prevailing reference rate, in general a lower interest rate environment is associated with a contraction in the net interest margin that banks are able to make (i.e. the difference between the lending and funding rates). In addition, the outlook for a bank’s net interest income growth will not be as rosy in a lower rate environment.