The euro crisis pushed New Zealand and Australian government 10-year bond yields to all-time lows yesterday as demand for higher-yielding safe haven investments soared in the wake of more fears about Europe.
AMP Capital fixed income portfolio manager Warren Potter said concerns about Greece and its possible exit from the eurozone were driving investors to government bonds and because yields were so low in America, investors were looking to Australia and New Zealand where the Governments remained stable and yields were higher.
"The weight of money means rates are falling. It has been ongoing for some time."
The pressure was particularly on in Australia, where the number of government bonds on issue was expected to drop as the country returned to surplus, putting further pressure on the supply and demand ratio.
Potter said he would not rule out rates going even lower.
"If things do deteriorate in Europe interest rates will deteriorate further."
However, if issues around Greece were resolved there could also be some relief and yields could go higher.
"It's a difficult time in terms of picking where things are going. We are relying on political decisions on the other side of the world."
The low yields are bad news for investors looking to maintain an income. Potter said the yields in the US were so low that once inflation was taken into account the real rate of return was negative. In New Zealand and Australia the return is still positive, although Potter said it was getting closer to a zero point.
The low yields signal that concerns are mounting of a global recession, but Potter said it might not eventuate as the concerns were also often a trigger for lower interest rates which provided stimulation through lower mortgage rates. New Zealand's 2023 bond, which is used as a proxy for 10 years, fell 11 basis points on Monday night and yesterday hit a yield of 3.635 per cent - much lower than the 4.2 per cent it hit during the global financial crisis.
Australia's 10-year government bond rate was also down, hitting 3.22 per cent, while US 10-year government bond yields also came close to an all-time low of 1.76 per cent.
Stock markets across the world have dropped sharply after Greece's political parties failed to form a coalition government at the weekend.
If a government cannot be formed, Greece will need to hold fresh elections next month, adding to fears it will exit the eurozone and default on its debt.
Japan's Nikkei 225 index fell 0.8 per cent to 8905.38. Earlier, the index briefly hit 8838.78, its lowest intraday level since February 3.
South Korea's Kospi index slipped 0.6 per cent to 1901.49.
Australia's S&P/ASX 200 lost 0.6 per cent to 4269.40.
Benchmarks in Indonesia and mainland China also fell.
But Hong Kong's Hang Seng, which some analysts said was oversold after more than a week of losses, rebounded 0.4 per cent to 19,816.55.
Oil prices fell to near US$94 a barrel on Tuesday in Asia, extending a two-week sell-off that has brought crude to a five-month low amid the concern.
"Greece's struggle to form a new government has moved to centre stage," energy trader and consultant Ritterbusch and Associates said in a report.
"The possibility of a significant economic slowdown in European economic activity is prompting contagion fears."
Oil investors are also taking their cues from global stock markets, which have slumped so far this month.By Tamsyn Parker Email Tamsyn, agencies