German bond yields stabilise after Chinese intervention

LONDON: A decline by German bond yields levelled out on Tuesday after China took measures to halt a slide in its currency and stock market.

German yields edged down to 0.56 percent, largely halting a slide of 9 bps on Monday, when investors were looking for a safe haven amid geopolitical tensions and doubts about the health of China's economy.

But analysts point out that euro zone inflation data came up short of expectations and China's actions looked like a temporary solution to the 7 percent drop in Chinese equities on Monday. "China's actions are certainly positive at the margin but overall the risk is that it is interpreted as a signal of weakness that these ongoing struggles to stabilise the market by the authorities aren't really bearing fruit," said Commerzbank strategist Michael Leister.

Beijing injected liquidity into domestic markets, set the value of its yuan currency stronger than many had expected and said it was studying rules to regulate share sales by major holders.

There were also reports of direct intervention in markets by state-owned funds to try and halt the stock rout.

The measures pushed Chinese shares up 0.3 percent on Tuesday. Euro zone stocks also opened higher, but by 1115GMT they were down 0.5 percent after falling more than 3 percent on Monday.

Lower-rated debt in Spain and Italy outperformed the German benchmark, with their yields down 4 bps at 1.68 and 1.51 percent, respectively.

In Catalonia, one of Spain's richest regions, bond yields fell to a three-week low as a local separatist coalition fractured, potentially leading to new elections and delaying independence plans.

INFLATION FRUSTRATION

Euro zone inflation data showed no sign that base effects from last year's slide in oil prices had faded away, creating more headaches for the European Central Bank.

That kept up the downward pressure on yields. Headline inflation was unchanged at 0.2 percent in December, missing expectations for a rise to 0.3 percent and far short of the bank's target of close to 2 percent.

The core inflation rate - which strips out energy costs - fell to 0.8 percent from November's 0.9 percent.

"Yields are going to find it difficult to rise on the back of this (data) clearly," said Credit Agricole strategist Orlando Green.

Tensions in the Middle East are also keeping investors cautious. Saudi Arabia cut severed diplomatic ties with Iran on Sunday after protesters stormed its embassy.