LONDON: Fears of economic slowdown in Europe and plunging inflation expectations dominated morning trade on Monday with Germany's 10-year government bond yield holding close to 0.10 percent.
The yield on Germany's 10-year Bond, seen as the risk free benchmark for the region, fell as low as 0.77 percent on Friday, its lowest since October 2016, reflecting dire concern in bond markets about economic conditions.
The prospect of another U.S. government shutdown, as well as concerns that the presence of U.S. warships in the South China Sea might disrupt the progress of trade talks this week, and continuing Brexit discussions, also weighed on risk appetite.
Last week the European Commission said it expected euro zone growth would slow to 1.3 percent this year versus an earlier estimate of 1.9 percent, while inflation is expected to be 1.4 percent, well short of the European Central Bank's target of just below 2 percent.
German data also pointed to a slowdown, though ING analysts expect that forth quarter GDP data, due on Thursday, should show that the bloc's largest economy avoided a technical recession.
China struck an upbeat note on Monday as trade talks resumed with the United States, but also expressed anger at a U.S. Navy mission through the disputed South China Sea.
If the negotiations do not progress sufficiently by March 1, the United States has said it intends to raise tariffs on $200 billion of imports from China to 25 percent from 10 percent.
"Trade talks and shut down (worries) are really weighing on markets," said Sebastian Fellechner, rates strategist at DZ Bank. "We don't see any major movements because of the general and global uncertainty."
Core 10-year government bond yields in the bloc were about two basis points higher in early trade,, though analysts said this was due to the absence of any new data or news, rather than a return to risk taking.
In the periphery, Italian bonds were outperforming, despite expected pressure on the Italian government for further fiscal adjustment following the European Commission's revision downwards of its growth forecast.
But analysts at ING said the EU will want to avoid reopening the discussion ahead of EU parliamentary elections and as such do not expect any action on the Italian budget yet.
Fitch is due to review Italy's credit rating on February 22.
The spread of Italy's 10-year debt over top rated Germany fell slightly to 284 basis points having edged closer to 300 basis points on Friday.
Italian government bond yields were two to five basis points lower across the curve though still held near to recent highs. Investors sold Italian debt last week following an 8 billion 30-year bond sale which led to a repricing of its existing bonds.
Around 14 billion euros of new supply is expected this week with the Dutch treasury due to kick of issuance with a new 2029 bond on Tuesday.
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