Ger­man bonds set for strongest week since Au­gust

Gulf Times Business - - BUSINESS -

Ger­man govern­ment bonds were set for their big­gest weekly gain since Au­gust on Fri­day thanks to the eq­ui­ties rout and dovish com­ments on the in­fla­tion out­look from ECB chief Mario Draghi.

Draghi said yes­ter­day that un­der­ly­ing in­fla­tion in the bloc would rise grad­u­ally, ton­ing down ear­lier re­marks which fore­shad­owed a “rel­a­tively vig­or­ous” rise, help­ing push yields lower.

Hav­ing risen in early trade in re­sponse to a firmer tone in world stock mar­kets, most high-grade bond yields in the eu­ro­zone crept back down to end lower on the day.

In Ger­many, the bloc’s bench­mark bond is­suer, 10-year yields were down two ba­sis points at 0.50% and be­low 4-1/2-month highs reached ear­lier this week at 0.58%.

They are down about 6.5 bps this week, the first de­cline in six weeks and the big­gest drop in two months.

While world stocks re­cov­ered some ground yes­ter­day af­ter this week’s rout, sen­ti­ment re­mained frag­ile. Euro­pean shares were last up 0.5% and off their highs.

This big­gest stock mar­ket shakeout since Fe­bru­ary has been blamed on a se­ries of fac­tors, in­clud­ing wor­ries about the im­pact of a Sino-US trade war, a spike in US bond yields and cau­tion be­fore the earn­ings sea­son.

“We’re still left with the sense that there has been a sig­nif­i­cant shift that mar­kets now have to take stock of,” said Chris Sci­cluna, head of eco­nomic re­search at Daiwa Cap­i­tal Mar­kets in Lon­don.

For some an­a­lysts, the rel­a­tively small fall in Ger­man bond yields was a sign of in­vestor re­luc­tance to buy fixed in­come.

“Ten-year Ger­man yields failed to close through 0.50% in spite of the Ital­ian bud­get tur­moil at the start of the week, and de­spite the global stocks melt­down,” Mizuho an­a­lysts said in a note.

Italy’s bonds sta­bilised, with two-year yields edg­ing 2 bps lower and 10-year yields flat on the day as risk ap­petite re­cov­ered.

An­a­lysts said a lot of neg­a­tive news has now been priced into the mar­ket.

Ital­ian 10-year bond yields rose to 4 1/2-year highs ear­lier this week on ten­sion be­tween Rome and the Euro­pean Union over the govern­ment’s ex­pan­sion­ary bud­get plans.

The In­ter­na­tional Mon­e­tary Fund said on Fri­day that Italy needs to re­spect EU bud­get rules and build a cash buf­fer for the next eco­nomic down­turn.

Por­tu­gal was also in fo­cus amid ex­pec­ta­tions that rat­ings agency Moody’s would lift its rat­ing by one notch later.

“It’s our base case that Por­tu­gal will be up­graded to in­vest­ment grade, it is over­due,” said Michael Leis­ter, rates strate­gist at Com­merzbank.

The other ma­jor South­ern Euro­pean na­tion, Spain, saw its 10-year govern­ment bond yield hit its high­est point in a year with two an­a­lysts cit­ing the mi­nor­ity govern­ment’s planned bud­get mea­sures as a driver.

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