Eurozone bond markets pause, yields rise

Trade wars, dire data fuel recession fears

LONDON, Aug 8, (RTRS): The eurozone’s government bond yields nudged up on Thursday, a day after plunging to record lows on growing fears that the world economy is heading for a recession that will push central banks to deliver aggressive easing steps.

After falling for nine straight days, its longest decline since late 2015, Germany’s 10-year bond yield was up just 2 basis points at -0.56%.

It reached record lows alongside other eurozone bond yields on Wednesday, after a shock large interest rate cut in New Zealand and dire German industrial production data fuelled expectations for rate cuts and new asset purchases from the European Central Bank.

Eurozone 10-year bond yields rose 2-3 bps – a mere blip in the sharp falls that have seen a growing number of yields drop below 0% for the first time.

That comes as an increasingly bitter US/China trade war fuels recession fears.

Washington on Monday branded Beijing a currency manipulator for the first time since 1994 after China allowed its currency to weaken beyond 7 per dollar for the first time in more than a decade.

The prospect of recession widened the inversion between US three-month bills and 10-year yields to 39 basis points on Wednesday, a level not seen since March 2007.

Long-term global borrowing rates have never been lower. The aggregate yield on a Bloomberg-Barclays index of seven- to 10-year bonds worldwide dropped to a record low 1.44% on Wednesday.

“The combination of trade war escalation, summer liquidity, expectations for more QE (quantitative easing) explain the latest move lower in bond yields and why real money investors have chased yields lower,” said Fabio Bassi, head of European rates strategy at JP Morgan.

“The result of what central banks actually deliver now and clarity on the macro impact of trade wars will set the tone going forward.”

Thursday’s bond selloff was most pronounced in southern Europe , which has benefited from the rush to grab bonds with a positive yield.