LONDON, May 24 (Reuters) - Bank of America Merrill Lynch on Friday revised down its year-end forecast for German bond yields, and said yields on one of the world’s safest assets could plummet to record lows in the third quarter as key events such as Brexit reached crunch time.
Yields on German 10-year government bonds hit 2-1/2 year lows of around -0.13% earlier this month as investors grew increasingly worried about economic growth, global trade tensions and Brexit uncertainty.
With yields in negative territory once again, many analysts have slashed their forecasts for German bonds, as well as other major markets where borrowing costs have fallen sharply.
“We revise our forecasts for Bunds (yields) to minus 10 basis points from 30 basis points for year end,” BAML said in a note. “Crucially, we see Bund yields at risk of reaching new lows of minus 25 bps in Q3 as we approach crunch time on accumulated event risks,” the note said, referring to world trade tensions, a Brexit deadline and a “confrontational” Italy.
Concern that Italy is getting ready to break EU rules means a possible confrontation between Rome and the European Commission over budget talks later this year is a key focus for markets. (Reporting by Dhara Ranasinghe Editing by Tommy Wilkes)