Investors retreat to German bonds after Wall St rout

LONDON: Investors retreated to the safety of German government bonds yesterday, pushing down yields, as the effects of a brutal selloff on Wall Street made themselves felt across the world.

Italian yields were a touch higher ahead of a key set of auctions, as market participants try to evaluate the country’s debt sustainability in the face of a high-spending budget plan and a recent sharp rise in borrowing costs.

US stocks tumbled on Wednesday, with the S&P 500 and the Dow marking their biggest daily declines since Feb 8, prompting US President Donald Trump to criticise the Federal Reserve.

The rout triggered a flight to safety bid, and the yield on better-rated eurozone government bonds – which move inversely to price – were all between four and five basis points lower.

German government bonds, seen as one of the safest and most liquid assets in the world, were at the forefront of this demand, with 10-year yields dropping six basis points to a one-week low of 0.49% before settling at around 0.51%.

This came after US Treasury yields dropped about eight basis points to 3.15%, coming off a seven-year high hit earlier this week on rate hike expectations.

This yield could be buffeted either way later yesterday, with US inflation data due.

“It remains to be seen whether the accelerating equity plunge is a healthy correction or the tip of the iceberg,” Commerzbank analysts said in a note.

“For sure it creates a more challenging environment for today’s (Italian) auctions.”

Short-dated Italian government bond yields were higher ahead of a key set of auctions. Two-year yields were up one basis point to 1.70% and five-year yields were five bps higher at 2.92%.

This discrepancy is likely linked to the maturity of the debt Italy plans to sell later yesterday. Its debt agency will look to raise up to 6.5 billion euros from the auction with 3-3.5 billion euros targeted to come from a three-year bond sale.

This auction will give investors an indication of how costly the recent sharp rise in Italian borrowing costs will prove to Italy’s public finances.

Italian yields are trading near four-year highs after the new anti-establishment government’s spending plans put the country on a collision course with Brussels and raises questions over the sustainability of public finances.

“The key issue for Italy is debt sustainability, so that’s why the results of the auction are important,” said Arnaud-Guilhem Lamy, a portfolio manager at BNP Paribas Asset Management.

“It’s important to see what the demand is like, and what sort of yields the bonds will sell at and the difference between the yields of the different bonds as well.” — Reuters