(Bloomberg) -- Germany’s yield curve is flashing a red alert over the European economy, and it may not be done yet.
The yield gap between two- and 30-year German debt is the lowest since the financial crisis, a sign that investors are pessimistic about the outlook for euro-area economies.
The narrowing has been led by increased demand for longer-dated notes amid global trade tensions that has forced investors to chase diminishing returns. The entire curve in Europe’s biggest economy is already fully below 0%.
“This is all setting up for something very disruptive,” said Marc Ostwald, a global strategist at ADM Investor Services. “What exactly is difficult to enumerate, but the flattening will continue as long as people believe that bunds are a safe haven.”
German 30-year bond yields dropped eight basis points to -0.11%, narrowing the spread over those on two-year bonds to 71 basis points, the lowest level since 2008. The comparable gauge in the U.S. is at 63 basis points.
Investors are seeking refuge in longer-dated bonds, betting that the European Central Bank will need to embark on quantitative easing again to counter a weakening economy. Shorter-dated bonds -- those more sensitive to interest-rate cuts -- have moved less, given the deposit rate is already deeply negative at -0.40%.
The flattening is unlikely to be finished just yet given the ECB may have to come up with alternative easing measures to counter stalling inflation, such as yield-curve control, according to Danske Bank AS. That refers to a practice by the Bank of Japan, which limits the range yields can move.
“This is all supportive for flatteners,” said Jens Peter Sorensen, chief analyst at Danske. The trend will continue “unless they start some significant fiscal expansion in Germany, but what is the chance of that?”
