Investors appear to be putting their money on the likelihood of more stimulus measures from the European Central Bank to keep the eurozone's shaky recovery from stalling.
That much is suggested by a startling fall in recent days in the borrowing rates for European governments.
The drop appears to anticipate a possible program of purchases of financial assets such as bonds by the ECB.
The bank has said it will wait until later this year to see if its current stimulus measures work before providing further help. But investors seem to be betting already that it will. They will be closely watching ECB President Mario Draghi's speech for more clues later Friday at a global banking conference in Jackson Hole, Wyoming.
As an extreme case, top-rated Germany paid nothing — zero percent — when it borrowed by selling six-month notes on Wednesday. Germany's super-safe 10-year government bonds yielded 0.99 percent on Friday, compared with 2.41 percent for 10-year U.S. Treasuries.
Here's what's going on and why:
MONEY FOR NOTHING: Yields on government bonds have fallen sharply as their prices have risen amid demand by investors. Price and yield move in opposite directions. Italy's 10-year bond fell to 2.56 percent annual interest this week, Spain's dipped as low as 2.38 percent. That's down from yields in the 6-7 percent range during the height of the eurozone crisis over public debt in 2011-2012. Germany's 2-year bonds briefly even traded below zero, meaning investor were willing to pay for the security of holding the financially solid country's debt.
GREAT EXPECTATIONS: There are different reasons investors are so willing to lend money to governments. For starters, possibility of default has fallen as the debt crisis has eased. Sometimes the yields are attractive because, with official interest rates at record lows in developed economies, good returns in other markets are hard to come by. In the case of zero yields for Germany, investors such as banks looking to stash excess cash and worried about the safety of their money can park it in German debt and know they'll get it back on time.
More than that, the ECB could decide later this year to print money and use it to purchase bonds. That could spur growth by increasing the amount of money in the economy. It would also mean a new buyer in the bond market with theoretically unlimited purchasing power.
The fall in yields "is just reinforcing that the market thinks the ECB has to do more," said Orlando Green, senior interest rates strategist at Credit Agricole. "Principally, the driving forces are the concerns with regards to growth and deflation fears."
SLIP SLIDIN' AWAY: Europe's economic recovery was weak already — but surveys of economic activity came in worse than expected this week, and showed industry contracting in France. That comes on top of a dismaying zero growth figure for the second quarter.
The ECB has already taken a raft of measures and wants to see how those work before doing more. It has cut its own benchmark, which heavily influences short term market rates, to a record low 0.15 percent. It has imposed negative rates on money that banks deposit with it, to push them to loan it or invest it instead. And it has promised more cheap loans to banks.
NOT IN TIME: There's been some impact from those measures. Market borrowing costs for companies in countries hit hard by the debt crisis, such as Spain and Italy, have been falling. Now they're more in line with what companies can borrow at in solid countries such as Germany. That should help businesses borrow, expand and grow. And the lower borrowing costs will help governments close budget deficits and keep taxes down.
But, says analyst Michael Schubert at Commerzbank, "there is a danger that the improvement in lending rates and interbank lending has arrived too late."
IMPACT: More stimulus from the ECB could help the global economy if it means Europe avoids a recession. It would also likely mean a weaker euro against the dollar, as lower rates tend to weigh on a currency. That's double true because the U.S. Federal Reserve is expected to phase out its own asset purchases later this year — about the time the ECB could be getting ready to unleash its own.
BUT WAIT: Analysts are speculating about exactly what the ECB would do. Some think it won't buy government bonds but would look for other assets to purchase from banks. The ECB is also preparing an effort to buy bonds backed by loans to small businesses. That would give banks another reason to make such loans.