Sunday 15 September 2019

Growth worries keep German Bund yield below zero percent

Germany stalling: People sit at a cafe terrace as skyscrapers stand beyond on the city skyline in Frankfurt
Germany stalling: People sit at a cafe terrace as skyscrapers stand beyond on the city skyline in Frankfurt

Dhara Ranasinghe

Germany's benchmark 10-year government bond yield held below zero percent on Thursday, a day after a disappointing German Ifo sentiment survey that exacerbated concerns about the euro zone's economic outlook.

Having hit one-month highs just a week ago, weak data from powerhouse economy Germany have pushed bond yields back towards recent 2-1/2 year lows deep in negative territory.

News overnight only added to a sense that world economic conditions remain weak -- providing a supportive backdrop to fixed income markets.

South Korea's economy unexpectedly contracted in the first quarter of the year, while the Bank of Japan on Thursday pledged to keep interest rates "extremely low" at least through early 2020.

And the Bank of Canada on Wednesday held interest rates steady but removed wording in its statement about the need for future hikes.

"The subdued global economic backdrop and the dovish tone from central banks means a continuation of the trend in bonds markets seen in recent days," said Commerzbank rates strategist Rainer Guntermann.

"The euro zone economic data, starting with the PMIs last week have been weaker than expected."

Germany's 10-year Bund yield was steady at minus 0.014pc, having dropped back into negative territory after Wednesday's Ifo sentiment index fell short of expectations.

Most 10-year euro zone bond yields were also little changed after hefty falls of 5-6 basis points the previous day .

The gap between short and long-dated German bond yields was a touch wider at 59 basis points, having tightened the previous day to around 51 bps -- its narrowest in almost a month .

There was some focus on Spain, which holds a general election this weekend.

The gap between Spanish and safer German government bond yields has widened this week, alongside peripheral peers -- a move analysts attributed to some caution ahead of the Spanish elections and Friday's S&P review of Italy's ratings.

Spain's election is its most divisive in decades and the outcome is uncertain, with no single party close to winning a parliamentary majority. Outgoing Prime Minister Pedro Sanchez looks best placed to form a government if his Socialist Party wins the around 30pc of the vote that polls have suggested.

"We can't say for sure what the make up of the next coalition will be, but I don't think it will challenge the consensus (on Europe)," said Michael Krautzberger, head of BlackRock's pan-European fixed income team.

"So I'm not too nervous about the Spanish election."


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