German 2-Year Yield Is Negative Again; Yield Curve Shows Flight To Quality, Deflation Risk

Germany's yield curve shows how bad it's getting in the euro area again, and some yields are back in negative territory. According to investing.com, the German 1-month bill yield closed at -0.028% and the German 2-year note yield closed at -0.010% on Friday. It's pretty crazy that the 2-year yield is negative. A flight to quality is occurring because a) euro area economies are either in a recession or stagnating; b) tensions are rising between Ukraine and Russia, and there is currently a trade war going on between Russia and the EU/US; c) there is deflation risk in the euro area, which could force the ECB to enact quantitative easing; and d) the U.S.'s Federal Reserve is set to end QE in October (stimulus), which could cause more market volatility.

Source: Investing.com

Below are charts of the German 2-year Schatz yield and 10-year Bund yield. The German 2-year yield was below zero in 2012 when sovereign default and contagion risk was high in the euro area (see posts from 2012 with charts: 1, 2). The German 10-year bund yield just broke below 1%.

Source: Investing.com

Source: Investing.com

Source: Investing.com

U.S. Treasuries are being bid up as well (yields are moving down). Here's a chart of the U.S. 10-year Treasury yield's treadmill to hell since the beginning of the year. The 10-2 year Treasury yield spread has been falling as well, but the 2-year yield is basically unchanged year-to-date.

Source: Investing.com

Source: Investing.com

Here is the 10-2 year Treasury spread via Ycharts.com (year-to-date). It bounced at the end of July and hasn't made a new low yet, but it is currently trending down.

Source: Ycharts.com

One of my market indicators at Dvolatility Research (Dvolatility.com) used the 10-2 Year Treasury Yield Spread. See the ULTRA Cyclical Fear Indicator.

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