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German government bonds surged to their strongest level on record and U.S. Treasury bonds soared on Tuesday, with investors fleeing to the safety of high-grade debt amid further signs that the economic recovery in the eurozone has hit the buffers.

The moves came after a closely watched indicator showed an unexpected sharp slump in German economic sentiment in September. Germany’s ZEW research institute said it couldn’t rule out a third-quarter recession in Europe’s largest economy.

Adding to the concerns, the German economics ministry on Tuesday slashed its forecasts for growth in 2014 and 2015.

German 10-year yields fell to a record low of 0.84%, and 10-year U.S. Treasury yields fell to a 16-month low of 2.18% as the market reopened after Monday’s public holiday.

Yields on bonds issued by a host of smaller eurozone countries perceived as safe by investors, including Austria, Finland, and the Netherlands, also sank to record lows Tuesday.

“Bonds are currently finding support from a multitude of sources, and even though the yields on offer look almost ridiculous in a longer-term perspective, even lower yields are ahead,” said Jan von Gerich, chief strategist at Nordea.

“Geopolitical tensions abound, there is no sign of inflation virtually anywhere, euro-area recession has become a hot topic again, risk appetite has been dented, while there are signs of central banks softening their rhetoric further. The natural question that arises is have yields already fallen enough. A short answer is no,” he added.

Inflation data also fanned fears over global growth. Figures for France, Italy and Spain all fell short of expectations, continuing to show anemic consumer price growth in September.

The figures dented the euro, interrupting its recent rebound against the dollar. The common currency was 0.7% lower at $1.2658.

Investors are betting that the European Central Bank will have to step up its stimulus efforts to head off the threat of deflation in the currency area–even if that means purchasing government bonds under a program of quantitative easing.

“The market is signaling deflation. I think it’ll keep sending those signals and eventually lead the ECB to QE,” said Eric Stein, portfolio manager and co-director of global income at Boston-based Eaton Vance, which has $288 billion in assets under management.

Mr. Stein doesn’t think eurozone bonds are attractive with yields so low, but is betting on a weaker euro given the contrast in between his expectations for ECB and the U.S. Federal Reserve, which is widely expected to hike interest rates next year.

Stock markets in Europe took a fresh tumble, echoing Monday’s late dive on Wall Street, although they picked up slightly as U.S. stocks staged a modest recovery at Tuesday’s open.

The Stoxx Europe 600 index was 0.6% lower mid-afternoon.

Despite a recent decline in stock valuations, indexes are likely to remain under pressure unless some upbeat earnings news can lure buyers back to the market, said Guy Foster, head of portfolio strategy at Brewin Dolphin, which manages GBP26 billion ($41.8 billion) of assets.

“The market is approaching oversold territory, but investors are reluctant to carry a lot of risk into earnings season,” he said.

Adding to those concerns, fears over the spread of the Ebola virus weighed on markets, and particularly on travel companies’ shares.

The European Union confirmed on Monday that it has convened a meeting of health ministers for Thursday to discuss screening of possible Ebola victims when they enter the 28-nation bloc.

Elsewhere, the British pound slid sharply after U.K. annual inflation unexpectedly fell to 1.2% last month. Sterling fell more than 1% to $1.5905, an 11-month low against the dollar.

In commodities, gold was 0.5% higher at $1,236 an ounce and Brent crude oil was down 1.6% at $87.43 a barrel.