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'Things may have to get worse first': Recession clouds are gathering over Europe

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31.05.2019

German bond yields have plunged to historic lows and inflation expectations are collapsing across the eurozone, prompting fears of a gathering recessionary storm.

The benchmark 10-year bund yield dropped to minus 0.18 per cent yesterday and is testing the all-time lows seen during the brief rush to safety after the Brexit referendum. Spanish and Portuguese yields have dropped to record lows.

There are growing concerns that the ECB is running out of options to stave off deflation. Credit:Bloomberg

A closely watched gauge of inflation expectations - five-year/five-year swap contracts - have collapsed this year and raise concerns that the European Central Bank is losing control. It is signalling a slide into a deflationary quagmire.

Ralf Preusser, global credit chief for Bank of America, said the bond markets are increasingly worried that the ECB can no longer halt the slide under the constraints of its policy mandate.

"They think it may be out of ammunition," he said. While the ECB can resort to radical measures in a crisis, the bar is uncomfortably high. "The sequencing of events means that things may have to get worse first," he said.

"The ECB has engineered deflation. It has followed the rule book of the........

© The Age