Euro zone yields remain at lows as Germany barely escapes recession

LONDON: Euro zone government bond yields hovered near recent six-month lows on Tuesday as the German statistics office said the country had escaped a recession but still recorded its slowest growth in half a decade in 2018.

Italy could provide some cheer to euro zone bond markets with its first syndicated bond deal in a year, but in the meantime, investors' focus remained on the German data which showed Europe's biggest economy had grown 1.5 percent in 2018.

The Federal Statistics Office said the economy probably grew slightly in the final three months of 2018 after contracting in the third quarter

While this allays investor concerns that Europe's largest economy would go into recession and undermine the European Central Bank's plan to gradually end crisis stimulus measures, it has only done so by the skin of its teeth.

"Germany escaped a technical recession but 2019 won't be easy with a weak start. Trade talks and euro zone momentum will be essential," Ludovic Subran, head of global macroeconomic research at Allianz said on Twitter.

ECB President Mario Draghi will address the parliament in Strasbourg and take questions from lawmakers at around 1500 GMT, and investors will be watching to see if he hints at a change in ECB's path for interest rate hikes.

The ECB's forward guidance is that it will hike rates later in 2019, but money market investors are only pricing in around a 45 percent chance this will actually happen.

As a result, most high-grade euro zone bond yields were pinned near recent lows.

France's 10-year bond yield dropped a basis point to 0.62 percent, a new six-month low, while Dutch 10-year yields dropped to 0.31 percent, near its lowest since April 2017.

Germany's 10-year bond yield, the benchmark for the region, was three basis points lower at 0.20 percent.

This week's change in the German benchmark 10-year bond means the yield isn't touching any milestones. The benchmark has moved to the February 2028 bond from an August 2028 maturity.

That 2028 bond is yielding 0.15 percent, marginally off 20-month lows of 0.141 percent hit at the start of the year.

Meanwhile, demand for Italian government bonds remained strong ahead of its imminent return to international debt markets with its first syndicated bond sale since January 2018

After a year in which bond market participants fretted over Italy's divided politics and plans to expand a debt pile that is already one of the largest in Europe, Italy launched a 15-year bond sale on Tuesday.

The issue was a test of market sentiment after Italy's government agreed to cut its budget deficit target for this year following a protracted row with Brussels.

"We are looking for a sizeable order book and a size of 7.5 billion euros," said Rieger of Commerzbank. "That will be showing to the market that they are able to tap the market even in the long-dated bracket and should bolster sentiment which has taken quite a hit from the banking stories."

Yields on 10-year Italian bonds slipped 1.6 bp to 2.83 percent, an 11-day low.

European government bond markets will also closely watch the upcoming vote in the UK parliament on British Prime Minister Theresa May's deal to leave the European Union. She is widely expected to lose the vote.