Undercurrent of risk pushes euro zone bond yields lower

LONDON: An undercurrent of political and policy risks pushed down euro zone government bond yields on Friday, discouraging investors from putting too much faith in improved economic data.

Despite a market-friendly result in the French presidential election and strong recent inflation and private sector activity numbers from the bloc, most euro zone bond yields are well below recent highs.

Germany’s 10-year government bond yield, the benchmark for the region, fell 3 basis point to a oneweek low of 0.33 percent — comfortably above the 0.2 percent level at the start of the year but well below the 0.51 percent March high.

Investors took their cue from policymakers staying cautious on the brightening political and economic picture in Europe and its implications for monetary policy.

“We have had a few positive political outcomes, but we still have Brexit negotiations to come, Italian and German elections, a potential Catalonia (independence) referendum and the unpredictable factor of Donald Trump’s presidency,” ING strategist Padhraic Garvey said.

“So even though we are moving toward higher rates in the US and tapering in Europe, in general poli- cymakers are being very careful.”

This was underlined this week when top European Central Bank (ECB) officials made it clear they would not favor changing the policy path they had already outlined.

US Federal Reserve minutes this week showed policymakers agreed to hold off on raising interest rates until it was clear a recent US economic slowdown was temporary.

Expectations the Fed will run down its balance sheet were also exerting downward pressure on yields, said Rabobank strategist Richard McGuire.

“As the Fed appears to be on the course on balance sheet normalization, that possibly adds to the bullish outlook for US Treasuries as they presumably will not hike rates at the same time they are reducing the balance sheet,” he said.

Ten-year US Treasury yields dropped 2 basis points to 2.235 percent while volatility in Treasuries hit a three-year low after the minutes signaled a steady, predictable balance sheet rundown.

A survey showed this week that businesses across the euro zone maintained April’s strong growth rate in May, pointing to 0.7 percent economic growth in the second quarter.