LONDON: Europe's benchmark German bond yields tumbled to the lowest in over nine months on Thursday after US Federal Reserve Chair Janet Yellen flagged market turmoil and a slowdown in China which could limit further rate rises in the world's largest economy.
Yellen told US lawmakers on Wednesday that the Fed was unlikely to reverse its plan to raise interest rates, having hiked for the first time in a decade in December, but financial conditions have become "less supportive" for growth.
Investors have all but ruled out further interest rate rises this year.
"While she was trying to be balanced, Yellen's comments were clearly dovish," Soeren Moerch, head of fixed income trading at Danske Markets, said.
Commerzbank pointed out Yellen's response to one question on the potential for negative interest rates to which she responded they are "something we will and should look at".
J.P. Morgan said this week that the Fed could take rates as low as minus 1.3 percent. Germany's 10-year bond yield fell 7 basis points in early European trading to 0.17 percent, the lowest level since April 2015 and headed towards a record low of 0.05 percent.
French, Dutch, Austrian and Finnish equivalents also fell to their lowest levels in over nine months.
In a further sign that the dim outlook for growth and inflation has raised the prospect for a global recession, US and German yield curves flattened.
The gap between US two- and 10-year yields has fallen below 100 basis points for the first time since 2007 while the gap between the German equivalents stands at 70 bps, the lowest since April 2015.
Yields on low-rated debt meanwhile were flat to a touch higher as riskier assets fell out of favour with investors.
European stocks sank, following a slump in Asia, while investors sought the safety of Japanese yen, gold and other top-rated bonds.
Portuguese bonds were the worst performer with yields up 9 bps at 3.65 percent, the highest since October 2014.
As the lowest-rated debt in the bloc behind Greece, Portuguese bonds has suffered the worst from the risk aversion over recent weeks, while the 2016 budget plan from its new leftist government -- that includes a series of measures rolling back austerity -- has spooked investors. Portuguese Finance Minister Mario Centeno must defend his plans at a meeting of EU finance ministers later on Thursday.
"Eurogroup (head Jeroen) Dijsselbloem has already proclaimed that he does not regard Portugal's budget proposals as being sustainable. And market participants see the matter similarly," DZ Bank strategist Ren? Albrecht said.
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