Investors seek safe assets
Eurozone bond yields fall in a climate of anxiety over Brexit, possible elections in Greece and weak Chinese data
Eurozone bond yields extended falls on Monday after weak Chinese data added to a gathering storm of risk aversion while investors await further clarity from Tuesday’s Brexit vote.
Eurozone bond yields extended falls on Monday after weak Chinese data added to a gathering storm of risk aversion while investors await further clarity from Tuesday’s Brexit vote in Britain’s parliament.
Concerns about the German economy and the government shutdown in the US, as well as the threat of a new election in Greece, added to the bid for safe haven assets across the bloc and 10-year bond yields fell as much as five basis points.
Asian and European shares led the fall on Monday after China’s exports unexpectedly fell the most in two years.
After a muted start, the bid for safe haven eurozone bonds gathered momentum, tracking a move by US treasuries in which 10-year yields fell 3.4 basis points to 2.66%. Germany’s 10year government bond yield, the eurozone benchmark, fell three basis points.
Matt Cairns, a rates strategist at Rabobank, cited signs of weakness in Europe’s hitherto strongest economy for helping to drive down Bund yields.
Data on Monday showed eurozone industrial output declined in November by more than expected.
“What is also feeding in is some discussion that there may be additional tax cuts required to prop up the German economy,” said Cairns.
“The possibility the European Central Bank can engineer higher rates is really failing.”
Legislators from Chancellor Angela Merkel’s Christian Democrats, meeting at the weekend, discussed introducing tax cuts when the governing coalition reviews its work towards the end of 2019, the party’s leader said.
Annegret Kramp-Karrenbauer, who succeeded Merkel as party leader late in 2018, told Welt television that tax cuts should be used as stimulus to pre-empt a possible downturn.
Finance minister Olaf Scholz said there was space for tax cuts if the outlook darkens.
German data has disappointed lately, pointing to a slowdown in growth that European Central Bank policymaker Ewald Nowotny said on Saturday could be a lasting phenomenon caused by structural problems, particularly in its car industry, rather than a one-off.
Investors are also poised ahead of Tuesday’s Brexit vote. The future path of Britain’s exit from the EU is uncertain as parliament is likely to vote down Prime Minister Theresa May’s deal on Tuesday. Outcomes include a last-minute deal, a disorderly exit, a new referendum or remaining in the bloc.
The threat of new elections in Greece kept upward pressure on its bond yields, with its 10year government bond yield two basis points higher at 4.3%.
Greek Prime Minister Alexis Tsipras said on Sunday he will call a confidence vote in his government after his coalition ally quit, depriving him of a parliamentary majority and raising the possibility of a snap election.
Greece is expected to bring a new syndication to market soon but further political uncertainty and any rise in yields may skewer its chances of a new deal in the short term.