LONDON, Nov 2 (Reuters) - German 10-year bond yields might fall as low as 0.1 percent within six months, nearing April’s record low, if the European Central Bank introduces further stimulus next month to fight off the threat of deflation, according to Citi.
This scenario is based on the U.S. bank’s new forecast that the ECB next month will expand its quantitative easing program by 15 billion euros per month and cut its deposit rate at least 10 basis points to -0.30 percent.
“According to various models, Bund yields of 0.1 percent seem to be consistent with this baseline. Previous estimates of equilibrium yields were in the region of 0.5-0.6 percent,” Citi rates strategist wrote in a note published late on Friday.
The ECB’s bond-buying programme is currently running at 60 billion euros a month and will total around 1 trillion euros when it is scheduled to expire in September next year.
But ECB president Mario Draghi indicated last month that more policy easing is on the cards, and the overwhelming view now among economists and financial markets is that QE will be increased and extended on December 3.
The 10-year Bund yield fell to a record low of 0.05 percent in April, before snapping back above 1 percent by early June in a so-called “flash crash”. On Monday it was hovering around 0.55 percent.
Citi’s rates strategists outline a “debt-deflation” scenario that includes a number of “plausible assumptions”, one of which is that the ECB doesn’t raise interest rates for 10 years.
The 0.1 percent call is among the most aggressive of the major investment banks. Earlier this year Citi called for -0.05 percent but abandoned that in May, saying that it would close this year around 0.4 percent.
Last month, HSBC said the Bund yield would go as low as 0.2 percent next year. (Reporting by Jamie McGeever, editing by Larry King)