LONDON: Euro zone bond markets looked more stable on Monday after solid US economic data eased some of the concerns over a slowdown in global growth that led to sharp sell-offs in peripheral debt last week.
Yields on the euro zone's lowest-rated debt rose by 40 to over 200 basis points from lows to highs last week -- among the biggest moves seen since the peak of the debt crisis -- before retreating on Friday.
Signs that another recession may be brewing due to a broader slowdown in global growth have caused investors to refocus on high debt levels in countries like Italy, Spain or Portugal.
But Friday brought a surprisingly strong Thomson Reuters/University of Michigan index of U.S. consumer sentiment -- the highest reading in more than seven years -- while new housing starts also rose more than expected last month.
Markets remained nervous, however.
"The dust is settling at the moment after the terrible week we had," said Patrick Jacq, rate strategist at BNP Paribas.
"Things remain vulnerable.... but there is not such a massive flight to quality as we had last week. The market is not yet really confident, but we see little reason to extend the massive movement we saw last week."
German 10-year Bund yields, which set the standard for euro zone borrowing costs, fell 1 basis point to 0.85 percent. Spanish and Italian yields were 2 bps up at 2.19 percent and 2.52 percent, respectively.
Comments from central bankers provided some support.
Boston Fed President Eric Rosengren said recent volatility in financial markets reinforces the need for the Federal Reserve to be patient with its policy stimulus. He said he could "easily imagine" a scenario in which the U.S. central bank keeps interest rates near zero until 2016.
The European Central Bank has started buying covered bonds as part of its new stimulus package, an ECB spokesman said on Monday.
VOLATILITY AHEAD
But analysts expect bond markets to remain volatile.
"The outlook that investors have at this moment on the economy and central bank policy is not very clear," said Alessandro Giansanti, senior rate strategist at ING.
"The trend should still be positive for Bunds, due to the risk of falling back into recession."
RIA Capital Markets bond strategist Nick Stamenkovic said data due this week were unlikely to ease investor concerns about the economy. Third quarter growth data in China on Tuesday are "almost certainly going to show a slowdown in growth" while flash business surveys in the euro zone on Thursday are likely to show that "the economy still is very much in the doldrums".
"The underlying sentiment remains pretty fragile. The sharp rise in volatility last week is likely to make investors cautious," Stamenkovic said.
Even markets in Greece were calmer on Monday after having their worst week since 2012 due to the risk of early elections next year and nervousness caused by Prime Minister Antonis Samaras' plans to exit the bailout programme early.
He told Reuters in an interview on Friday he can lead his country out of the four-year aid deal and not call early elections. One possibility was a credit line which Athens could tap post-bailout if markets got nervous, he said. However, it is far from clear whether such an option is open.
Greek 10-year yields were 9 basis points lower at 7.96 percent, having climbed above 9 percent last week.
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