LONDON: German bond yields sank on Thursday to their lowest level in over two years after the European Commission cut growth and inflation forecasts, likely complicating the European Central Bank's plans for an interest rate hike this year.
The Commission said euro zone growth will slow to 1.3 percent this year compared to the earlier estimate of 1.9 percent, while inflation is expected to be 1.4 percent, well short of the ECB target of just below 2 percent.
Germany's 10-year bond yield, the benchmark for the bloc, dropped more than three basis points to 0.128 percent, its lowest level since November 2016. Other high-grade euro zone bond yields were also down between 2-4 bps.
"Updated ECB projections should also show slower inflation and that could be sufficient for the ECB to decide on new measures," said Commerzbank rates strategist Rainer Guntermann.
"These could be more stimulus measures - probably liquidity measures or a change to the interest rate forward guidance."
The overall trend for declining Bund yields looks to be in place, he added.
The euro slipped as well, hitting a two-week low of $1.1320, down a quarter percent on the day
A market gauge of long-term euro zone inflation expectations, the five-year breakeven rate, also dropped to its lowest since Nov 2016 at 1.4807 pct
Italian 10-year yields extended an earlier rise and were up 10 basis points on the day to a one-month high of 2.942 percent as weakening growth raises risks of a wider budget deficit.
The closely-watched Italy-Germany 10-year bond yield spread was at its widest in two months at 279 basis points, wider 14 bps on the day.
"The downward revision with all the implications for (the Italian) deficit is causing some uncertainty," said Guntermann.
Italy went into recession in the second half of 2018, and indicators show this downward momentum is continuing.
Investors worry this means the Italian government's planned spending measures will push the deficit even higher than originally planned.
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