Investors stick with Eurozone debt

Government bond yields in much of the Eurozone held near recent 2-1/2 year lows yesterday, as demand for safehaven debt held strong in the face of growing concern about economic growth, trade tensions and political turmoil in Britain.

British Prime Minister Theresa May said she would quit, deepening the Brexit crisis as a new leader is likely to want a more decisive split with the European Union and raising the chances of an unpredictable snap election.

This comes in a week that has seen more disappointing economic data and growing fears that a US-China trade spat could become a more entrenched strategic dispute between the world’s two largest economies.

‘Positive for bonds’

“The general assumption in the market up until now was that things would get better,” said Peter Schaffrik, global macro strategist at RBC Capital Markets in London. “But then the US-China trade talks broke down, Brexit uncertainty is rising and the data is not improving. If you put that altogether it is positive for bonds.” Ten-year bond yields in the United States, Germany, Japan and Britain were all set for a third straight week of falls.

Germany’s Bund yield was marginally higher at minus 0.11 per cent, just 2 basis points away from recent 2-1/2 year lows.

France’s 10-year bond yield was steady at 0.28 per cent, within striking distance of 2-1/2 year lows, while 10-year Austrian and Belgium bond yields fell 3 bps apiece. “To be really bearish on Bund yields you need to expect the ECB to announce a balance sheet reduction and that’s not going to happen for a few years,” said Eric Oynoyan, G10 senior interest rate strategist at BNP Paribas.