German yields near lows as weak industrial data underlines ECB caution

LONDON: Euro zone bond yields dipped on Monday after German industrial production fell in January, adding weight to market bets on a slowing European economy and the European Central Bank's dovish policy stance.

Industrial output data showed that Europe's largest economy is still suffering from trade frictions and unease about Brexit after narrowly avoiding recession last year.

"We have had a lot of sentiment indicators pointing to this, but industrial production is hard data and it is really cementing the impression that the European economy is slowing down," said Mizuho rates strategist Antoine Bouvet.

"It is lending credibility to the view that the slowdown is not temporary, and the ECB's decisions last week amounted basically to preventative action."

Germany's 10-year bond yield, the benchmark for the region, slipped about a basis point to 0.065 percent.

It hit a 26-month low of 0.048 percent after the ECB on Thursday pushed out the timing of its first post-crisis rate hike and offered banks a new round of cheap loans to help revive the euro zone economy.

Other euro zone yields were also lower on the day, with Belgian 10-year yields a shade away from a one-year low at 0.54 percent, and Portuguese 10-year yields only a handful of basis points off an all-time low hit last week.

"With hindsight, the latest batch of disappointing industrial data explains why Bundesbank President Jens Weidmann supported last week's decisions by the ECB. The German economy could currently use some monetary tailwinds," said Carsten Brzeski, an economist at ING.

The cautious stance by European policymakers was echoed across the Atlantic over the weekend, with U.S. Federal Reserve chair Jerome Powell saying the central bank does "not feel any hurry" to change the level of interest rates again.

Data on Friday showed that February job growth in the United States was its weakest in nearly 1-1/2 years.

Uncertainty about Brexit is also keeping yields pinned lower, with two major eurosceptic factions in the British parliament warning that Prime Minister Theresa May was facing a heavy defeat when she puts her exit deal to a vote.

Weaker sentiment was best portrayed in the euro zone by Italian bond yields, which rose firmly off last week's lows and were 5-7 basis points up across the curve, with the 10-year yield higher 5 bps at 2.56 percent.