LONDON: Benchmark German 10-year bond yields were set for their biggest weekly fall since November on Friday as investors remained cautious around Ukraine tensions going into the weekend.
News that US Secretary of State Anthony Blinken had accepted an invitation to meet with Russian Foreign Minister Sergei Lavrov late next week initially prompted optimism and sent bond yields rising on Friday morning.
But caution overtook in later trading as Russian-backed separatists in eastern Ukraine said they planned to evacuate their breakaway region’s residents to Russia, a shock turn in a conflict the West believes Moscow plans to use to justify an all-out invasion of Ukraine.
Friday’s fall in yields adds to sharp falls over the previous two sessions as investors clamoured for safe-haven assets driven by fears that a Russian invasion of Ukraine may be imminent. Bond yields fall when prices rise.
Germany’s 10-year yield, the benchmark for the bloc, was down 3 bps to 0.20% by 1519 GMT. Having fallen nearly 9 bps this week, it is on track for its biggest weekly fall since November.
Yields on Italian bonds, which have outperformed in recent days, briefly touched their lowest in over a week at 1.814% but were last down less than one bp at 1.84%.
The closely-watched risk premium over German bonds was a touch higher at nearly 163 bps.
“I think it’s the normal phenomenon since the pandemic that, whenever it’s Friday and you’re faced with a long weekend, a lot of things can happen. You tend to see this move in Treasuries and Bunds where people play safe,” said Michael Leister, head of interest rate strategy at Commerzbank.
Leister added that headlines on Friday were more of a catalyst for investors to hedge their bets rather than changing the market’s view on Ukraine.
Central bankers were also in focus on Friday. ECB policymaker and Slovak central bank governor Peter Kazimir joined a growing camp of rate-setters in favour of ending the ECB’s bond-buying programme.
Kazimir said purchases could end in August but this should not be seen as paving the way for an immediate interest rate hike.
Markets on the other hand, still price in around 40 bps worth of hikes by the end of the year, while a Reuters poll this week showed economists expect the bond buys to end by September.
A number of Federal Reserve speakers will also appear towards the end of the European session.
Later on Friday Fitch and S&P Global will review France’s credit rating. Both agencies rate it at AA, but Fitch currently assigns a negative outlook. Moody’s will review Cyprus’s Ba1 rating, which is one notch below investment-grade.
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