German 7-yr bond yields fall below zero as QE nears

German borrowing costs out to seven years fell below zero for the first time and Italian yields dipped ahead of an auction on Thursday in further signs of frantic investor demand for euro zone government debt.

With Greek risks fading after the country agreed a bailout extension with its international creditors this week, attention has returned the ECB’s trillion euro programme due to be launched next week.

Germany and Portugal sold debt at new record lows, in five- and 10-year sales respectively on Wednesday, while Italy is aiming to raise a total of 8.75 billion euros through auctions of four-year, five-year and ten-year paper on Thursday.

“Given that the ‘Greek’ tempest on the euro bond market has died down for the time being and that the ECB will be launching its purchase programme next week, the auction should meet with brisk demand,” said DZ Bank strategist Hendrik Lodde.

For Italian bonds, there was no sign of the underperformance in secondary trading that can often precede auctions as investors make room in their portfolios to take down new supply.

Italian 10-year yields opened 3 basis point lower at 1.43 percent, a shade above record lows of 1.41 percent hit after the ECB’s scheme was announced in mid January.

Irish equivalents also extended falls, having slipped below 1 percent for the first time on Wednesday. The 10-year benchmark dipped 2 basis points to 0.95 percent.

Most other euro zone equivalents were 2-3 basis points lower on the day with only Portugal and Greece – the lowest-rated debt in the bloc – bucking the trend.

In Germany, seven-year yields dipped around 2 basis points to hit a new trough of -0.003 percent. Ten-year yields were 2 bps lower at 0.304 percent, just off a record low of 0.298 percent hit last month.