German government borrowing costs shoot above one per cent

Chris Papadopoullos
Follow Chris
THE GERMAN government’s 10-year borrowing costs shot above one per cent yesterday for the first time since September last year.

It marks a sharp twist of fate for the interest rate on Germany’s 10-year government bond, which nearly turned negative in April after months of steady decline.

At a negative interest rate, investors would essentially be paying the German government for the privilege of lending cash to them. The volatility of Germany’s government bonds, also known as bunds, has come as a shock to traders due to their historical stability.

European Central Bank chief Mario Draghi has warned markets to expect more volatility down the road.

Analysts believe the central bank’s nascent bond purchasing programme will continue to make more turbulence in markets, as was the case in the UK when it began its asset purchas programme, also known as quantitative easing.

Under the programme, the central bank creates new money to buy government bonds.

Draghi, and other European rate-setters, have said on many occasions that they will see the programme through until September 2016.

Economists have also said the rise in yields may be attributable to rising inflation expectations and better growth prospects for the Eurozone economy.