LONDON: German 10-year bond yields briefly traded below 1 percent for the first time on Thursday as the euro zone's economic recovery stalled in the second quarter, bolstering bets for fresh stimulus from the European Central Bank.
Spanish and French bond yields also plumbed record lows as the bloc's grim growth outlook increased pressure on the ECB to eventually print money to support an economy bracing for the impact of tit-for-tat sanctions between the West and Russia.
A surprise 0.2 percent contraction in economic output in Germany, the euro zone's growth engine, and a stagnation in France halted the currency bloc's recovery. Analysts polled by Reuters had expected the euro zone to eke out a 0.1 percent quarterly expansion.
The data sounds a warning for the coming quarters, when tough sanctions imposed on Russia in July over its involvement in the Ukraine crisis start to bite.
"Disappointing euro area growth and intensifying disinflation pressures increase the pressure on the ECB for further action in coming months," said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh.
"However, an early move is unlikely as the ECB assesses the impact of the September four-year LTROs (long-term cheap loans to banks). But if the economy disappoints in the second half then the pressure on the ECB to start QE (money-printing) in early 2015 will intensify."
German 10-year yields, the benchmark for euro zone borrowing costs, briefly fell to an all-time low of 0.988 percent, according to traders who contribute to trading platforms on Tradeweb and Bloomberg. The yield was last 2 bps down at 1.011 percent.
French and Spanish 10-year yields hit record lows of 1.392 percent and 2.42 percent respectively.
SUSTAINED LOWS
Pressure on the ECB to act is already mounting as inflation in the euro zone remains subdued. French Finance Minister Michel Sapin urged the central bank in an op-ed in French daily Le Monde to do more to combat deflationary risks and make the euro more competitive.
Against that backdrop and combined with uncertainty over turmoil in the Middle East and Ukraine, many in the market expect yields on Bunds, perceived as a safe haven in times of turmoil, to stay pinned at ultra-low levels.
"The level here, plus or minus, could be sustained for quite a while ...It will take quite some moves in the market and especially on hard data to give yields a hard push upwards from here," said Simon Fasdal, head of fixed income trading at Saxo Bank.
A report showing Germany reduced its roughly 2 trillion euros of public debt last year for the first time since post-war records began in 1950 added to a growing view of reduced supply pressure for the market in the coming year.
The Federal government has already said it is aiming to have no new borrowing next year as record tax revenues and rock-bottom interest rates have reduced the burden of serving the country's 1.3 trillion euros of federal debt.
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