Talk of lower German growth helps keep bond yields below zero percent

LONDON: Germany's 10-year government bond yields held close to but still below zero percent on Friday with reports of a further downgrade to German growth in 2019 by Der Spiegel adding further evidence of widespread economic slowdown in Europe.

The German government is expected to halve its economic growth forecast for 2019 to 0.5 percent from 1.0 percent due to weaker exports in the wake of global trade tensions, the news magazine reported late on Thursday.

This is more pessimistic than the 0.8 percent estimate Germany's leading economic institutes gave for German growth, down from a previous estimate of 1.9 percent.

Worries about European growth prompted the European Central Bank to maintain its dovish stance at its April meeting on Wednesday. The expectation of continued accommodative monetary policy in both the euro zone and in U.S. kept downward pressure on core yields.

However, European Central Bank policymakers are increasingly leaning towards rewarding banks for lending to households and businesses but are mostly sceptical about giving lenders a reprieve from a charge on their idle cash, four sources told Reuters on Thursday.

"This report should go some way to help dampen market expectations for another rate reduction by the ECB," wrote UniCredit analysts in a note. "Rate-cut expectations have built up modestly since the tiering discussion started in late March."

Other core 10-year bond yields were around half to one basis point lower on the day.

GREECE LEADS PERIPHERAL CHARGE

Peripheral government bond yields continued to benefit from the ECB's dovish signals.

Greek government bond yields remained at 13-year lows on Friday, having fallen 19 basis points this week and 21 basis points last week.

The Greek 10-year yield was at 3.35 percent, while the five-year yield was at 2.2 percent. .

Italian government bond yields also held close to recent lows even after Economy Minister Giovanni Tria told the daily Il Messaggero that reducing Italy's high income tax burden is a "necessary act of justice" and the government will take steps in the next budget.

A stand-off with the European Union over the size of Italy's projected budget deficit last year saw its spreads blow out, but a last-minute decision by the government to adhere to EU rules brought bond investors back.

Italy's 10-year government bond yield was last at 2.52 percent.