Germany’s benchmark 10-year government borrowing costs are on track to fall below zero for the first time, raising fresh concerns over the damaging side effects of the European Central Bank’s bond-buying programme.

Yields dropped to just 0.16 per cent on Friday, compared with 0.54 per cent at the start of the year, and as the ECB enters its second month of quantitative easing, many analysts think it could be only a matter of time before German 10-year yields drop below zero.

Switzerland – a much smaller market that is not part of the eurozone – last week became the first government in history to sell 10-year debt at negative interest rates, raising worries about distortions in global financial markets.

Negative yields in Germany would have much greater symbolic importance for the ECB, which holds a policy meeting in Frankfurt on Wednesday. They would highlight the shortage of the highest quality European government debt caused in part by the ECB’s own buying programme.

Steven Major, global head of fixed-income research at HSBC, said negative yields rendered conventional valuation techniques redundant. "There is no coupon and you are taking a bet on their future price. This is not what bond markets are supposed to do . . . the whole thing is crazy."

Negative yields mean investors, in effect, pay to lend their money to governments and are guaranteed a loss if they hold the bond until maturity.

– (Copyright The Financial Times Limited 2015)