The three-month Euro Interbank Offered Rate has dropped below zero, as the European Central Bank conducts quantitative easing. "It's good news for borrowers, not so good news for lenders," said Ciaran O'Hagan of Societe Generale. "[ECB President Mario] Draghi wants us to spend the cash. The purpose of QE is to get us to take on some risk."
Central bank stimulus and concerns about deflation have pushed borrowing costs for European governments to record lows. In $19 billion worth of auctions, Sweden sold bonds with a subzero yield for the first time, while German notes carried a negative rate.
The European Central Bank might relax buying requirements for high-yield bonds to purchase repackaged Greek and Cypriot debt. The ECB can purchase instruments from all eurozone members if the Governing Council approves. Germany might be in the minority in opposing the plan.
The inflation rate for the eurozone held at an annualised 0.5% last month, according to Eurostat. The European Central Bank has said any inflation rate below 1% puts the region in a "danger zone" of slipping into deflation.
The eurozone isn't yet experiencing deflation, but a dramatic fall in the rate of inflation means it will continue to be a risk, said Bank of Italy Governor Ignazio Visco, who also serves on the European Central Bank Governing Council. Fear that deflation will sweep through the eurozone might be enough to depress investment and consumer demand, he said.