Germany's benchmark 10-year Bund yield fell to its lowest level in more than a year on Tuesday, pushing closer to zero against a backdrop of rising political risks in Europe and unprecedented monetary stimulus from the European Central Bank.
Data on Monday showed the ECB, faced with a scarcity of bonds for its asset-purchase programme, bought more German, French and Italian bonds than its rules dictate in May.
The €1.74 trillion programme has helped to depress bond yields. The average yield of German bonds in circulation dipped to minus 0.02 per cent on Monday, falling below zero for the first time, according to data from the German Bundesbank. The average yield stood at minus 0.01 percent on Tuesday.
Bund yields - the euro zone benchmark - are less than 2 basis points away from striking a record low and are expected to stay that way as a June 23rd referendum on Britain's membership of the European Union approaches.
Uncertainty about the outcome of the referendum and its implications for the euro zone are boosting demand for German bonds - deemed one of the safest assets in the world.
"There is a number of reasons why you can't be short Bunds right now," said Mizuho strategist Peter Chatwell. "Number 1 is the UK referendum and political risks in the euro zone."
In addition, Spain votes on June 26th in a re-run of an inconclusive December election. And last weekend, the anti-establishment 5-Star Movement made headway in local elections in Italy - piling pressure on Prime Minister Matteo Renzi.
German 10-year yields were down 1.6 basis points at 0.067 per cent, having fallen as low as 0.064 per cent, their lowest since late April 2015.
"We have a safety bid for German bonds right now and the ECB's asset buying is compounding downward pressure on bond yields," said Rainer Guntermann, a strategist at Commerzbank.
Brexit jitters, while boosting demand for German bonds, are weighing on peripheral bonds that are seen as especially vulnerable.
"We could see talk of more countries leaving the euro zone, so Europe could suffer more than the UK," said Patrick Zweifel, chief economist at Pictet Asset Management.
Italian yields notched up their biggest one-day rise in six weeks and Portuguese yields hit a three-week high on Monday on the back of the Brexit fears and Italy’s municipal election results.
But peripheral bonds were on a firmer footing on Tuesday after dovish comments from US Federal Reserve Chair Janet Yellen.
Italian, Spanish and Portuguese 10-year yields fell around 4-6 basis points, unwinding the rises of the previous day.
Data showing the euro zone economy grew by 0.6 per cent in the first quarter of 2016, the highest rate for 12 months, and German industrial output rose slightly more than expected in April also helped boost risk appetite.