German Bund yields resume fall as concern over growth returns

LONDON: Bund yields fell towards new lows on Friday, after poor industrial data from Italy and a report saying Germany will cut its economic forecast.

The prospect of economic slowdown has dominated the euro zone bond market for much of the week, beginning with weaker- than-expected German industry data and continuing with the International Monetary Fund's lowering its economic forecasts.

Yields on German, French, Spanish, Austrian and Belgian bonds all reached record lows on Thursday after minutes of the US Federal Reserve's latest policy meeting suggested it was in no hurry to raise interest rates.

They rose early on Friday, after Fed officials played down the minutes.

But they resumed their decline after data showed Italy's industrial output rose only 0.3 percent in July, versus a 0.5 percent forecast.

Two German government sources said Germany would cut its economic growth forecasts for 2014 and 2015 next week. German Bund yields, the benchmark for euro zone borrowing costs, were 2 basis points lower on the day at 0.88 percent, just off a record low of 0.859 percent. They traded as high as 0.92 percent earlier.

"There are concerns over global growth, and if Germany is going to struggle then the whole Europe is going to struggle," said Alan McQuaid, the chief economist at Merrion Stockbrokers.

The Fed minutes, which said the central bank would wait for a "considerable time" before raising rates after its bond-buying programme ended, prompted some investors to bet the first rate increase would not come until the third quarter of next year.

Fed Vice Chairman Stanley Fischer later said "considerable time" meant somewhere between two and 12 months. And San Francisco Fed President John Williams said a mid-2015 rate rise was "a reasonable guess."

"We thought it was a dovish Fed meeting, but then there was a feeling it wasn't like that," said Jan von Gerich, chief fixed income analyst at Nordea. "Most surprising was vice chair Fischer ... his main point was to play down the minutes."