Negative yields in Euro zone will lead to duration mismatch

European Central Bank's (ECB) asset purchase program is prompting yields dive further in negative territory with Germany being most favored by investors.

• Germany sold 10 year inflation linked bonds at a deeper negative yield compared to March.
• 10 year inflation linked bonds were sold at -1.09% compared to -0.89% at last auction in March.

Purely reading from the yield, investors are expecting inflation to remain in negative territory for a very long time. It can also be concluded that demand for European debt remains extremely high.

• Consumer prices have been dipping in negative territory since the beginning of the year. Consumer prices in Euro area fell by -0.6% in January, -0.3% in February and -0.1% in March compared to a year ago.

ECB and the National Central Banks (NCB) will not be buying to negative yield s lower than the deposit rates which as of now stands at -0.20%.

However, they will try as much as possible to stay away from negative.

Current negative yield on some government securities will clearly influence central banks' purchase pattern.

• Negative rates in core countries will prompt NCBs to buy longer dated securities whereas peripheral NCBs might be buying up shorter dated ones.

This pattern will lead to a duration mismatch in the portfolio between core and the periphery.

This might lead to the point that ECB might have to hold the balance sheet at elevated level for longer time horizon should it choose to hold till maturity.

Under such assumption Euro will remain on weaker ground for considerable time.