Borrowing costs across Europe slid further this week, amid raised hopes of a U.S. Federal Reserve-style quantitative easing (QE) program to boost the euro zone's struggling economies.
For the first time, yields on several euro zone sovereign bonds turned negative-meaning that investors are effectively paying to governments to hold their money.
Finnish, Dutch, Belgian and Austrian 2-year bond yields all turned negative for the first time this week, hitting record lows. German 2-year Schatz (Germany:DE2Y-DE) and 3-year Bunds (Germany:DE3Y-DE) also yielded under 0 percent.
Finnish bonds reached a low of -0.010 percent on Tuesday, while Austrian Bunds (Austria:AT2Y-AT) yielded a low of -0.002 percent. Dutch and Belgian bond yields turned negative on Monday, with the former yielding -0.006 percent on Tuesday and Belgium's turning narrowly positive.
This came after a stage-stealing speech from European Central Bank (ECB) President Mario Draghi at the Jackson Hole symposium of central bankers on Friday, in which he suggested more would be done to boost the euro zone economy and limit the risk of deflation. His comments have fueled expectations of further easing-potentially as soon as at the central bank's September meeting-and boosted European equities as well as bonds.
"The market appears to be pricing a rising probability of further action by ECB," noted Barclays analysts Bill Diviney and Kieran Davies in a note on Tuesday.
Euro zone government bond yields have been on a broadly downward slide since Draghi pledged to do "whatever it takes" to save the euro from collapse back in 2012. This June, borrowing costs-particularly for the less-robust "peripheral countries"-took a further tumble after Draghi announced multiple measures to boost the region's growth prospects, including introducing negative rates on the ECB deposit facility.
At Jackson Hole, Draghi referred to the risks a further drop in euro zone inflation would cause, and said the ECB would use "all available instruments" within its mandate to ensure price stability over the medium term.
"Draghi's comments at Jackson Hole have also supported our view that the ECB will take the plunge into full-blown quantitative easing, probably around the turn of the year," Capital Economics' analysts said in a research note on Tuesday. "A longer period of near-zero interest rates in the euro-zone should keep yields much lower in Germany than in the U.S."
Euro zone inflation fell more than expected in July, coming in at just 0.4 percent-the lowest level since October 2009.
Recently, Reuters and Greek newspaper Ekathimerini have reported that Greece plans to take advantage of the lower borrowing costs, with a debt exchange from Treasury-bills to 1.5 billion euros ($1.98 billion) in 3-5-year bonds in the coming weeks.
-By CNBC's Katy Barnato