LONDON: Euro zone government bond yields remained close to all-time lows on Monday with the United States' trade agreement with Mexico failing to dampen the strong rally in bonds prompted by global growth concerns.
European shares rose on Monday after the United States on Friday dropped its threat to impose tariffs on Mexico, removing a major sticking point for equity markets. Goodwill was also injected into the market by data showing that Chinese exports had risen more than expected, despite higher U.S. tariffs.
However, core bond yields in the bloc were still at all-time lows, despite the two basis point move higher in the German bund in early trade to -0.24%, as expectations of easier monetary policy fuel bond buying.
"The small move higher is in acknowledgement that some of the tail risks have been mitigated with the U.S. not implementing tariffs with Mexico," said Peter Chatwell, head of rates strategy at Mizuho
European Central Bank policymakers are open to cutting the ECB's policy rate again if economic growth weakens in the rest of the year and a strong euro hurts a bloc already bearing the brunt of a global trade war, two sources told Reuters.
Bond yields across the bloc fell to multi-year, if not all time lows, last week after data showing a sharp slow down in non-farm payrolls fuelled speculation of rate cuts by the Federal Reserve.
The weak U.S. data came a day after the European Central Bank ruled out raising interest rates in the next year and even opened the door to cutting them or buying more bonds as risk factors such as the global trade war and Brexit drag the euro zone economy down.
While Italy's bond yields also held close to their lowest level in over a year, analysts pointed to the spread of its 10-year debt over Germany as an indicator that investors remain concerned about the dispute between Italy's government and the EU over its expansive budget.
Though its 10-year bond yield has returned to levels not seen since May 2018, the Italy/Germany bond yield gap is elevated at 260 basis points.
"This is not a normal level of spread," said Mizuho's Chatwell. "There is a lot of fear and Italy is trading quite differently to other European bond markets."
Italian Finance Minister Giovanni Tria said on Sunday he was sure he would be able to hatch a deal with the European Commission over Italy's public finances despite threats of disciplinary action.
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