LONDON: Germany's 10-year government bond yield fell further into deeply negative territory on Thursday after a survey showed business activity in the bloc was weaker than expected in May, adding further evidence that trade wars are dampening economic growth.
Euro zone business growth undershot expectations this month, bogged down by a deepening contraction in the bloc's manufacturing industry which is increasingly affecting service firms, IHS Markit's Flash Composite Purchasing Managers' Index(PMI) showed.
The overall euro zone PMI data, considered a good guide to economic health, only nudged up to 51.6 this month from a final April reading of 51.5, below the median expectation in a Reuters poll for 51.7.
In the individual readings, French business activity jumped to its strongest level in six months, but German business activity undershot expectations, prompting a further fall in German government bond yields.
It has been a dismal few months for the global economy with the trade conflict sending a frisson through markets and chilling business activity across the world.
Europe in particular has seen its recovery sputter and Germany's industrial sector - the continent's engine room - has actually gone into reverse.
Activity in Germany's services and manufacturing sectors fell in May, the survey showed on Thursday.
IHS Markit's flash PMI for manufacturing fell to 44.3 from 44.4 in April, the fifth monthly reading in a row below the 50 mark that separates growth from contraction.
German business morale also deteriorated more than expected in May, the Ifo institute showed on Thursday, suggesting that Europe's largest economy is losing steam after the solid growth it posted at the start of the year.
Germany's 10-year government bond yield fell to a day's low of -0.111pc, sliding back down towards the recent 2-1/2 year low of -0.132pc.
French 10-year yields also fell to 0.29pc, down 1.5 basis points after data from IHS Market showing that its PMI rose to 51.3 points, up from 50.1 points in April.
The German economy returned to growth in Q1, final data confirmed earlier in the session, and had risen 0.4pc quarter on quarter, driven by stronger household spending and a pick-up in construction.
European parliamentary elections begin on Thursday with voters heading for the polls in the UK and Holland. Initial results will be announced on Sunday evening.
The rise of populist, eurosceptic parties has thrust the European elections, normally a dull affair mostly ignored by global markets, to the forefront of portfolio managers' list of concerns.
Investors are weighing the chances of eurosceptic groups grabbing a third of the seats.
Britain's last-minute participation in the elections will boost support for eurosceptic groups in the European Parliament by about 1.5 percentage points, according to Goldman Sachs estimates. Overall, they see support for the populist parties rising to 20-25pc from around 15pc.
US Treasury yields also slipped lower after Fed minutes showed that rates would likely remain at current levels for some time, with the central bank's patient stance reiterated.
"Members observed that a patient approach ... would likely remain appropriate for some time," with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5 percent, the Fed on Wednesday reported in the minutes of its April 30-May 1 meeting.
Ten-year US Treasury yields extended Wednesday's three basis point fall by a further two basis points to trade at 2.37 percent.
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