Core European government bond yields continue to fall and are now outright negative in many countries. Traditionally, this would suggest a stern message from the fixed income market that deflation is around the corner.
But there could be other explanations.
Firstly, government bond yields may be negative due to positive momentum and short term positions which are maintained independent of long term capital preservation aims and negative long term returns.
Secondly, financial oppression is now a structural feature of the economic system which means that yields may stay lower for longer and even move into negative territory. Captive buying by financial institutions is likely now a structural feature of government fixed income markets. This is especially the case as it is now no longer impossible that senior bond holders in European banks may take losses which leave sovereigns as the last port of call.
Thirdly, some economies such as Denmark and most recently Japan announcing the removal of the lower floor of the BOJ refi rate have to open the door for negative yield due to currency considerations and the risk of hot money inflows. In a world where the ECB is now sending a serious message that Euro deposits may at some point carry a negative carry, it is only natural that fixed income instruments denominated in euros price in such an eventuality.