German Bund yields back within striking distance of record lows

•  The prospect of a prolonged economic slowdown across the globe whacked equity markets and sent investors, once again, fleeing to safe-haven bond markets.
• We are in an uncertain environment and that explains the overall risk sentiment, so investors are rushing to safe-havens whether that's short-dated German bonds or inflation breakevens in the euro area.
• With markets this volatile, there are increasing concerns for liquidity, and though German paper is scarce it still has the allure of being the safest in Europe.

LONDON: Germany's benchmark 10-year Bund yield fell to a six-month low on Friday, within striking distance of last year's record lows, as coronavirus rattled world markets and investors fretted about just how much the global economy will be hit.

The outbreak spread across the United States on Thursday, surfacing in at least four new states.

The prospect of a prolonged economic slowdown across the globe whacked equity markets and sent investors, once again, fleeing to safe-haven bond markets.

In top-rated Germany, the 10-year German Bund yield fell to a six-month low at -0.739% - within striking distance of record lows hit last September at the height of concern about the Sino-US trade war.

Two-year German bond yields also hit six-month lows, falling to almost -0.90% - a sign investors now price in extreme pessimism on euro zone growth.

And in a worrying sign for the European Central Bank, a key gauge of the market's long-term euro zone inflation expectations fell to a record low at around 1.019%.

The ECB targets inflation at close to 2%.

"We are in an uncertain environment and that explains the overall risk sentiment, so investors are rushing to safe-havens whether that's short-dated German bonds or inflation breakevens in the euro area," Commerzbank rate strategist Rainer Guntermann said.

Data showing German industrial orders surged in January provided little comfort to a market already looking past numbers that do not capture the impact of the coronavirus outbreak.

"Today's session may bring record lows for the 10-year Bund yield," said Peter McCallum, rates strategist at Mizuho.

"With markets this volatile, there are increasing concerns for liquidity, and though German paper is scarce it still has the allure of being the safest in Europe, naturally benefiting during flight-to-quality moves."

Ten-year bond yields in Italy, which has been at the centre of the coronavirus outbreak in Europe, rose and were last up 3 bps on the day at 1.09%.

US Treasury yields extended their decline, with 10 and 30-year yields hitting new record lows

Two-year US Treasury yields, which fell below 0.5% to their lowest since 2015, have slid around 85 bps in the past two weeks. That puts them on track for their biggest two-week fall since 1987.

Analysts said Friday's bond market action not only reflected concern about the economic damage coronavirus will inflict but also worries that central bank action will prove ineffective.

The European Central Bank meets next week and markets are positioned for a 10 bps rate cut. However, with rates already deeply negative, further easing is seen having a limited impact.

Earlier this week, the US Federal Reserve delivered an emergency rate cut. Australian and Canadian central banks have also cut rates this week.

"Next week's ECB meeting will be a difficult one with a wide range of views at the table," said Chris Scicluna, head of economic research at Daiwa Capital Markets.