German Bund yields near zero pc, French bonds set for best week since 2016

LONDON: Germany's benchmark 10-year bond yield took a step closer to zero percent on Friday as weak economic data from Europe's biggest economy and China reinforced the dovish stance from the European Central Bank a day earlier.

The ECB on Thursday pushed back the timing of its first post-crisis rate hike until 2020 at the earliest, cut its growth and inflation forecasts and offered banks a new set of cheap loans to support economic growth.

That sparked a huge rally in bond prices across the bloc, pushing yields to their lowest since at least 2016, and left most bond markets set for their best week in months.

A key gauge of long-term inflation expectations fell to a two-week low in a sign that investors were unconvinced that ECB policy action would boost inflation prospects.

Data on Friday added to concern about global growth: China's exports tumbled the most in three years and German industrial orders posted their biggest drop in seven months in January.

German 10-year bond yields fell to 0.048 percent . They are at their lowest level since 2016 -- a year that saw the ECB ramp up stimulus and cut rates to fight deflation and weak economic growth.

French 10-year bond yields also hit their lowest since 2016 at around 0.40 percent. They are down 17 basis points this week, set for their biggest weekly drop since July 2016 - shortly after Britain's Brexit referendum fuelled fears about the global growth outlook.

"The ECB has had a bullish impact on bond markets and that is set to continue," said Ciaran O'Hagan, rates strategist at Societe Generale in Paris.

"We were not expecting something so clear, so soon and markets were not either so bond yields are likely to stay low for longer."

ECB President Mario Draghi caught even dovish rate-setters off guard by pushing for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said on Thursday.

Following the ECB meeting, money markets pushed back expectations for a first rate hike to late 2020.

Finnish bond yields showed little immediate reaction to news that the government had resigned after ditching plans to reform the healthcare system.

Southern European bond yields, which all saw hefty falls on Thursday, were higher on Friday.

Italy's 10-year bond yield rose 4 bps to 2.53 percent . But it is down 21 bps this week and set for its biggest weekly drop since September. Spanish and Portuguese yields are down around 15 bps each this week, also set for the biggest weekly drop in months .

"If, as we expect, eurozone growth remains below potential for longer than the policymakers currently assume, their policy response risks being less swift than it was today - in other words, the ECB may find itself on the back foot once again," analysts at BNP Paribas said in a note.