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By Bloomberg

German 10-year government bond yields, already at the lowest on record, may drop to near zero, according to Royal Bank of Scotland Group Plc.

The bank’s analysts are targeting a yield of 0.13 percent on 10-year bunds by the end of this quarter, about 36 basis points lower than the current level, while “negative yields would not be impossible,” they wrote in a research note published yesterday. The securities were little changed today after German factory orders fell for the first time in three months in November. Spain and France auctioned debt today.

“Bunds are far from rich,” the RBS analysts, including London-based Giles Gale, wrote in a note dated Jan. 7. “How far can the bund go? Without being too aggressive we get to 0.13 percent.” RBS is one of 37 financial institutions that deal directly with Germany’s debt office.

Germany’s 10-year yield was at 0.49 percent as of 12:03 p.m. London time, after touching 0.432 percent yesterday, the lowest since Bloomberg started tracking the data in 1989. The price of the 1 percent bund due in August 2024 was 104.78 percent of face value.

RBS, whose previous 10-year yield target was 0.42 percent, expects inflation and activity data in the euro region to continue softening, boosting demand for the safety of German government debt. Slower inflation preserves the value of the fixed-interest payments on bonds.

The inflation rate in the euro area fell below zero for the first time in more than five years, the European Union’s statistics office in Luxembourg said yesterday, while a Jan. 6 report showed a gauge of euro-area services and manufacturing signaled economic growth slowed in the final quarter of 2014.

Debt Sales

France auctioned 9.5 billion euros ($11.2 billion) of debt maturing between 2024 and 2045. The Paris-based Agence France Tresor allotted 4.85 billion euros of bonds due in November 2024 at an average yield of 0.79 percent, the lowest in an auction since Bloomberg began compiling the data in 1999.

While the declines in bond yields may be good news for governments seeking to fund at cheaper levels, they also highlight Europe’s economic strife. The threat of deflation has led to speculation the European Central Bank will begin purchasing government bonds, which would reduce the amount of outstanding bonds on the secondary market and potentially drive prices higher.

German factory orders, adjusted for seasonal swings and inflation, slid 2.4 percent after a revised increase of 2.9 percent in October, data from the Economy Ministry in Berlin showed today. Economists surveyed by Bloomberg predicted a decline of 0.8 percent. Euro-area consumer prices dropped an annualized 0.2 percent in December, the EU’s statistics office in Luxembourg said yesterday.

Spain sold 5.01 billion euros of debt due between 2020 and 2037 today. Spanish 10-year yields rose two basis points to 1.71 percent today, while those on similar-maturity French bonds were little changed at 0.80 percent.

German securities returned 11 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. Spain’s earned 14 percent and France’s 12 percent.