German Bund yield crashes below zero for first time since 2016 on bleak data

LONDON: Germany's 10-year bond yield dived below zero percent on Friday for the first time since October 2016, as a survey showing German manufacturing contracted for a third straight month fuelled fears about a widespread European slowdown.

Those concerns were exacerbated when the US manufacturing sector flash Purchasing Managers' Index (PMI) came in below estimates, triggering an inversion of the US bond yield curve for the first time since 2007.

In a session of eye-popping moves across major bond markets, Germany's 10-year bond yield slid over 6 basis points to minus 0.033 percent, its lowest since October 2016.

French and Dutch long-dated bond yields hit their lowest since 2016 , British gilt yields fell to their lowest since September 2017 and the 10-year US Treasury yields slid 10 bps to 14-month lows.

"We had tentative signs of a stabilisation in the economic numbers and then the data came out today and it suggested there is no stabilisation," said Peter Schaffrik, global macro strategist at RBC Capital Markets in London.

IHS Markit's flash composite Purchasing Managers' Index measuring activity in German services and manufacturing, which together account for more than two-thirds of the economy, fell to 51.5 in March, its lowest reading since June 2013.

The broader euro zone PMI meanwhile showed that businesses across the 19-country currency bloc have performed much worse than expected this month.

"The narrative behind it isn't a big surprise ... But the size of the surprise is fairly material. These things happen very rarely, and the surprise is what matters the most for market activity," said Antoine Bouvet, rates strategist at Mizuho.

The bleak data comes as the US Federal Reserve this week abandoned its projections for a rate hike this year and Brexit uncertainty has grown, bolstering demand for safe-haven assets.

The ripple effects were felt across markets.

The euro fell 0.8 percent to below $1.13, while Europe's STOXX 600 index tumbled 1.3 percent. Italian bond yields rose as a "risk-off" mood gripped investors. On Wall Street, US stocks sank 1.5 to 2 percent .

In a worrying sign for the European Central Bank, its favoured market gauge of long-term inflation expectations fell to 1.4105 -- down almost 7 bps from Thursday's closing levels to its lowest since 2016.

HOW LOW?

Concern about growing recession risks was highlighted by the move in the US bond yield curve. The gap between three-month Treasury bills and 10-year note yields inverted on Friday for the first time since 2007.

In France and Germany, 30-year bond yields slid almost 10 bps each as investors moved up the government bond curve in the hope of getting some yield . They were set for their biggest daily falls since 2016.

Germany's 10-year yield last hit zero percent in October, 2016, when ECB chief Mario Draghi dispelled market concerns about tapering and said the ECB remained committed to its now-ended asset purchase programme. Bund yields below zero percent show investors are willing to pay the German government to hold its long-term debt, seen among the safest of assets.

"We think Bund yields can now certainly revisit the minus 0.15 percent area which refocuses investor concerns about the growth trajectory," said Rabbani Wahhab, senior fixed income fund manager at London and Capital.