LONDON: Germany's benchmark 10-year government bond yield fell below 0.5 percent on Wednesday for the first time since early January as investors, increasingly fearful of a US-China trade war, flocked to safe-haven assets.
Chinese state media reported on Wednesday that Beijing plans to announce retaliatory tariffs against US President Donald Trump's plans for tariffs on up to $60 billion of Chinese goods.
Germany's 10-year Bund yield fell as low as 0.48 percent in early trade, down 1 basis point on the day.
Analysts said the prospect of retaliatory action by China had dented a brief global equities recovery and kindled safe-haven demand for bonds.
Investors have also rotated out of the tech sector, which had long outperformed the market, knocking world shares down. Wall Street shares suffered a 2-3 percent blow on Tuesday, tech-heavy bourses such as those of Korea, Taiwan and Hong Kong fell more than 1 percent on Wednesday and European bourses opened sharply lower.
"There's a general rotation from risky assets towards safe haven assets... with weakened equities and trade war tensions in the general backdrop," said ING rates strategist Benjamin Schroeder. "In the euro zone, you also see data coming somewhat on the disappointing side and the ECB striking a more dovish tone."
Economic sentiment in the 19-countries sharing the euro slipped for the third month in a row in March, while bank lending slowed, data this week showed.
ECB Governing Council members Erkki Liikanen and Jozef Makuch said on Tuesday that underlying inflation in the euro zone may remain lower than expected even if growth is robust, so the central bank needs to remain patient in removing stimulus.
Most euro zone bond yields were down 0.5-2 basis points on the day.
Italy's 10-year bond yield fell to its lowest levels in more than three months at 1.86 percent, down 1 basis point on the day. Its gap over better-rated German peers was at 137 bps.
Italy will offer up to 7.5 billion euros in an auction which will include 5-year and 10-year BTP bonds.
"The BTP auction will help gauge investor sentiment towards Italy, as Italy's political future remains uncertain," said ING's Schroeder.
After an inconclusive election on March 4, the prospects of a coalition agreement between the far-right League and anti-establishment 5-Star Movement have grown.
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