LONDON: German government bond yields hit five-week lows on Thursday with risk aversion dominating financial markets after the minutes of the US Federal Reserve's June meeting failed to signal any further easing.
Doubts over proposed measures to tackle the euro zone debt crisis are also permeating sentiment, keeping safe-haven Bunds well supported and pushing yields back towards their recent lows.
"It's risk-off today in general, the Fed minutes didn't signal a smoking gun for further easing," said Nick Stamenkovic, rate strategist at RIA Capital Markets.
"That's disappointed risk markets and is giving support to Bunds."
Minutes from last month's Fed meeting, published late on Wednesday, showed the world's biggest economy might need to worsen further before the central bank takes any more easing steps. That pushed equities lower overnight, with European shares following them down.
Weak Australian jobs data added to worries about global economic growth, while a surprise rate cut in South Korea, a 50-basis point cut in Brazil to a record low and a lack of any clear policy action by the Bank of Japan added to the cautious mood.
September Bund futures were 20 ticks higher at 144.84 while 10-year yields were two basis points lower at 1.25 percent. Analysts and traders expect a test of the 1.13 percent all-time low hit in June.
"Even though we've seen some easing of peripheral yields this week, Bunds are underpinned by a combination of European Central Bank policy and backburner concerns about the periphery," a trader said.
After the ECB cut interest rates last week, two-year yields have hovered around zero, pushing investors seeking even a small return into longer-dated debt or into the semi-core countries such as France and the Netherlands.
PERIPHERY HOLDS UP FOR NOW
Yields on Spanish and Italian bonds were lower, continuing this week's easing, and helped by Spain's announcement of new austerity measures on Wednesday.
However, traders said there had been very little buying of the paper meaning the move was likely to be limited, something reflected by widening bid/offer spreads, particularly on Spanish bonds.
The bid/offer spread on 10-year Spanish bonds is around 80 cents, the most since late January and compared with 20 cents on French paper of the same maturity. The equivalent Italian spread is around 30 basis points but has been widening steadily this month.
"Spain is getting the benefit of the doubt over the latest fiscal measures ... but if the fiscal dynamics worsen then Spanish bond yields are likely to go up again," Stamenkovic said.
Markets are also concerned about a lack of detail over how the euro zone's rescue funds could be used to stabilise Spanish and Italian debt markets in the face of opposition from Finland and concerns there is simply not enough cash should both countries need help.
Spanish 10-year government bond yields were seven basis points lower at 6.52 percent, with the Italian equivalent down three basis points at 5.77 percent.
Italy will sell 7.5 billion euros of bills ahead of a 5.25 billion euro bond sale on Friday.
Meanwhile, Ireland said it could issue 10-year bonds by March next year if negotiations on improving the terms of its bank bailout go well.
Irish 10-year bond yields have fallen almost a full percentage point since late June and yields across the curve are now lower than equivalent Spanish maturities. ?AFP
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