LONDON: Yields on top-rated German government bonds were pinned at six-month lows on Thursday, as tumbling equity markets and a renewed slide in oil prices boosted demand for safe-haven assets.
European stock markets fell more than 2 percent and US equity futures pointed to a weak open for Wall Street shares after the arrest of a top executive of Chinese tech giant Huawei renewed concern about global trade wars.
The risk-off mood was exacerbated by a drop in oil prices after the Organisation of the Petroleum Exporting Countries signalled it may agree to a smaller output cut than expected. It meets in Vienna on Thursday to decide its production policy alongside non-OPEC countries such as Russia.
Against this backdrop, yields on higher-rated euro zone bonds fell across the board: France’s 10-year bond yield fell to 0.655 percent, its lowest level since August; Finnish and Irish 10-year bond yields fell to their lowest since September.
In Germany, the bloc’s benchmark bond issuer, long-dated yields fell 3 basis points to 0.242 percent — matching a six-month low hit on Wednesday.
“We are also scratching our heads about the level of German Bund yields, but it all depends on oil and stock markets right now,” said Alexander Aldinger, a rate strategist at Bayerische Landesbank.
Bund yields are not far off lows hit at the peak of a rout in Italian bond markets in late May, reflecting uncertainty in world markets regarding trade tensions, the growth outlook and next week’s key vote in the British parliament on Prime Minister Theresa May’s Brexit deal.
As oil prices fell, adding to downward pressures on inflation in the single currency bloc, a long-term gauge of the market’s euro zone inflation expectations fell back towards more than one-years lows hit recently.
“If the inflation outlook deteriorates that feeds back in to ECB policy making,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “We don’t think the ECB will be able to raise rates next year.”
An inversion of the short-end of the US government bond yield curve this week for the first time in a decade has also created some anxiety, since it could be a prelude to an inversion of the broader US yield curve – viewed as an indicator of recession risks.
Elsewhere, Italy’s bond market was unable to escape the broader selloff in risk assets, with short-dated bond yields last up 7 bps on the day .
News that Italy’s ruling League party is resisting a large cut to the 2019 budget deficit also weighed on sentiment.
The League will accept only a minor reduction to next year’s budget deficit target of 2.4 percent, senior party sources said on Thursday, conceding little to Brussels, which says the plan breaks European Union public finance rules.