German bond yields dip to new record lows
Weak German data fans recession fears
LONDON, Aug 7, (RTRS): German long-dated bond yields tumbled to new record lows deep in negative territory on Wednesday as a large rate cut from New Zealand and weak German data gave further impetus to a relentless rally in bond markets.
While some calm has returned to world markets after a ratcheting-up in US-China trade tensions over the past week, fixed income markets continue to benefit from the expectation that a bitter trade war raises global recession risks and strengthens the case for monetary policy easing.
New Zealand’s central bank stunned markets by cutting its official cash rate by a bigger-than-anticipated 50 basis points, and looked set to keep policy lower for longer in the face of growing economic risks.
“While New Zealand rarely registers on the radar for European bond markets, the big rate cut at the moment adds to the feeling that central banks need to get ahead of the curve in acting aggressively and not letting their currencies rise,” said Christoph Rieger, head of rates at Commerzbank.
Ten-year bond yields across the euro area fell 4-5 basis points. The Dutch 10-year bond yield hit a new all-time low at -0.478%.
Across the bloc, 30-year bond yields dropped 7-9 bps, with German ultra-long dated yields falling a record low of almost -0.13%.
Germany’s benchmark 10-year bond yield slid to a record low of -0.58%, taking its falls so far this year to a hefty 82 bps. HSBC said on Tuesday the German Bund yield could tumble to -0.8% by year-end.
It has fallen for nine straight sessions, its longest streak of falls since November 2015, according to Refinitiv data.
Data showed German industrial output fell more than expected in June, a further sign that Europe’s biggest economy contracted in the second quarter as exporters got caught in trade disputes.
“All in all, we would characterise today’s industrial production report as devastating, with no silver lining,” said Carsten Brzeski, chief economist at ING Germany.
Falling German long-dated bond yields pushed the gap over shorterdated peers to just 25 bps – its tightest since 2008.
“We are seeing some pretty strong bullish flattening across curves,” said Rabobank fixed income strategist Matt Cairns.
“If you are paying for the privilege of holding long-dated German debt, that is indicative of a market that doesn’t expect central banks to pull back on easy policy anytime soon.”
Last week’s vow by US President Donald Trump to impose a 10% tariff on $300 billion of Chinese imports from Sept 1, sharply escalating a bruising trade war, pushed German 30-year bond yields and the whole curve below 0% for the first time.
Germany meanwhile sold 2.646 billion euros in a top-up of its 0.00 percent, 5-year Bobl notes in a weak auction that led to a slight underperformance of five-year bonds.