Negative yields aren't solely due to expectations that the ECB will buy bonds. They also reflect risks of deflation and low long-term growth. Also, banks would rather buy bonds on negative yields than leave their money with central banks in the eurozone and Sweden, who are charging them for such deposits.
Michala Marcussen at Societe Generale warns that this problem could get worse. Banks, she says, cannot merely hold their assets in the form of bank notes because they must pay to store and guard them. This, she says, means that central banks could in theory charge even more negative rates if they need to. Banks' fear of this is also encouraging them to hold bonds. Because such rate cuts would lead to rising bond prices, non-bank investors are holding bonds because of the chance of capital gains. "Yields could fall much further into negative territory," warns Ms Marcussen.
The ECB hopes that negative yields will encourage companies and households to spend more. This week saw signs of this: Eurostat reported a 1.1 per cent rise in retail sales in January and purchasing managers say growth has hit a seven-month high. But some economists fear negative yields will instead encourage households to save more to make up for negative returns and encourage businesses to buy back shares rather than invest in new equipment. They also fear negative central bank deposit rates will squeeze banks' profits and so deter lending. These risks also mean that bond yields might fall further.
This isn't merely a European problem. Because government bonds are substitutes for each other, negative yields in Europe are holding down yields in the UK. And they are hitting the US, too. One reason for the dollar's rise has been that investors hunting for yield have switched into US assets. The possibility of more switching, allied to the risk that negative rates will have adverse effects on the world economy, means there is a danger that the Federal Reserve might raise rates prematurely. Lombard Street Research's Dario Perkins says: "Investors see a significant chance of Fed policy errors."
