Euro zone bond yields drop as markets reassess no-deal Brexit risks

LONDON: Core euro zone government bond yields fell by 3-5 basis points on Friday, with Germany's benchmark yield hitting a one-month low, as the risk of a no-deal Brexit added to the euro zone's economic woes, prompting investors to seek safer assets.

European shares fell as markets re-evaluated the likelihood of a no-deal Brexit.

Britain is more likely to leave the European Union's orbit on Dec. 31 without a trade deal than with an agreement, the head of the European Commission was quoted as telling the bloc's 27 national leaders on Friday.

Euro zone bond yields resumed their downward trend, with Germany's benchmark 10-year bond yield falling to a one-month low of -0.639pc at 1238 GMT, down 4 bps on the day.

"It's mostly Brexit-driven, I think," said Antoine Bouvet, senior rates strategist at ING, citing Von der Leyen's comments as a key driver.

"This is harming the economic prospects of both -- the UK more, but those markets are very correlated I think. It's just one on top of many economic risks for the euro zone," he said.

Spain's 10-year yield entered negative territory for the first time on record, touching a low of -0.001pc, down 3 bps on the day.

The move comes after Portugal's 10-year yield also fell below zero for the first time on Tuesday.

Spanish and Portuguese 10-year yields were both close to all-time lows at 1249 GMT.

Ireland's 10-year yield also hit its lowest on record, down 3 bps at -0.33pc at 1251 GMT.

Euro zone yields rose temporarily on Thursday when the European Central Bank expanded its bond-buying programme as expected.

But Thursday's sell-off in bond markets was small because ECB chief Christine Lagarde noted that inflation remained disappointingly low and said that the PEPP envelope "need not be used in full".

As market sentiment turned cautious on Friday, investors also focused on the economic impact of rising COVID-19 cases and lockdown restrictions in Europe, analysts said.

Governments across Europe have imposed restrictions on activity to limit the spread of the coronavirus during the Christmas holiday period.