Euro zone bond yields fall sharply after weak US retail sales

LONDON: Euro zone government bond yields fell sharply on Thursday after weak U.S. retail sales compounded concerns about slowing U.S. growth, and German GDP data showed its economy did not grow at all in the fourth quarter.

U.S. retail sales recorded their biggest drop in more than nine years in December suggesting inflation will stay low, and supporting the Federal Reserve's pledge to be "patient" before raising interest rates further this year.

German 10-year government bond yields fell as low as 0.086 percent following the U.S. retail data, close to the near 2-1/2 year lows of 0.07 percent hit on Friday.

Andreas Steno Larsen, senior global FX/FI strategist at Nordea, said that data was likely distorted by the U.S. shutdown, and equity turmoil from October onwards.

"Distortions or not in December, we could see weaker retail sales growth going forward - also the January report will be influenced by the shutdown that lasted until 25th of January," he said.

The 10-year U.S. Treasury bond yield fell as low as 2.64 percent and was last down 4.5 basis points on the day .

European data was also less than encouraging, showing that  Germany just escaped recession in the final quarter of 2018 while the broader euro zone economy grew just 0.2 percent quarter-on-quarter.

Ten-year government bond yields in the bloc were up to 5 basis points lower.

Belgium's 10-year government bond yield, for instance, was down 5 basis points on the day at 0.68 percent. Ireland's 10-year bond fell 4 bps to 0.85 percent.

"Investors are eager for a yield pick up and German yields are low and lower for longer so better credits with a higher yield are benefiting," Commerzbank rates strategist Rainer Guntermann said.

Bond yields in the bloc's top-rated economies have fallen sharply this year as a string of weak economic data and cuts to 2019 growth forecasts prompted investors to reassess both the economic and monetary policy outlook.

Germany's economy did not grow in the final quarter of 2018, data showed, compared with a Reuters forecast for growth of 0.1 percent. It escaped recession by the narrowest of margins after contracting in the July-September period for the first time since 2015.

"There are basically two things weighing down yields at the moment - Brexit uncertainty and, in the past six weeks, increased attention to negative data surprises and their possible repercussions for the ECB (European Central Bank),"  Norbert Wuthe, rates strategist at Bayerische Landesbank, said.