LONDON: German Bund yields recorded their biggest daily fall in 2016 on Tuesday as concerns about the global economy outweighed fears that bond markets could see a repeat of the sell-off that struck a year ago.
Ten-year yields, which rose for three successive weeks ahead of inflation data on Friday that marked the anniversary of last year's bond blowout, fell 8 basis points to just below 0.20 percent, the biggest daily fall since early December 2015.
Strategists said a combination of poor Chinese data, lower growth and inflation forecasts from the European Commission, and weakness in the dollar and stock markets had driven demand for the European safe-haven asset. "We are just pushing back against that idea of a messy sell-off that people had been looking at over the last couple of weeks," said Owen Callan, a senior analyst at Cantor Fitzgerald.
In price terms, Bunds rose around three quarters of a point to 102.90. With coupons near zero, investors make most of their returns through capital appreciation but this can be a risky strategy when yields are so low.
When yields shot from a record low of 0.05 percent to over 1 percent in a matter of weeks last year, investors were left nursing double-digit percent capital losses.
All other euro zone yields fell on a day where the single currency touched its strongest level against the dollar since August 2015.
A stronger euro puts downward pressure on inflation by increasing the cost of imports, while a drop in the oil price on oversupply worries is also making life difficult for the ECB which is trying to revive consumer price growth.
"With the euro at these levels, this would be something the ECB starts thinking about in terms of further easing," said Peter Chatwell, a strategist at Mizuho.
Euro zone growth will be slower than previously expected with subdued inflation this year, the European Commission said in its economic forecasts on Tuesday.
The external risks to the bloc's economy were underlined by a survey which showed activity at China's factories shrank for the 14th straight month in April.
Growth worries triggered a slide in almost every major stock market around the world.
Europe's major indices shed as much as 2 percent. Elsewhere, Portugal's 10-year bond yield fell to a one-month low on relief that the risk of a cut to the country's only remaining investment grade rating has faded for now.
Ratings agency DBRS maintained Portugal's BBB rating with a stable outlook on Friday, ensuring its bonds remain eligible for the ECB's bond buying programme.
"DBRS not only kept Portugal's rating unchanged but left the outlook unchanged too, so the risk of a downgrade is fading and that's why we are seeing an outperformance of Portuguese debt," BNP Paribas European rate strategist Patrick Jacq said.
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