10-year Bund yield hits record low on weak data, month-end dash

LONDON: German bond yields slid to all-time lows in a thinly traded market on Wednesday as slowing euro zone growth and weaker US data fuelled global economic concerns before an expected interest rate cut by the Federal Reserve.

The Fed is expected to cut rates by 25 basis points later on Wednesday. With investors focused on central bank guidance for any further rate reductions, trading was predictably quiet.

German 10-year government bond yields fell some four basis points in late trade to an all-time low of -0.438%, while 30-year yields were down 5 bps to record lows of 0.129%.

"It is a combination of weaker US data, euro zone growth and month-end buying by index trackers which are adjusting in a thin pre-Fed summer market," said Christoph Rieger, rates strategist at Commerzbank.

US labour costs rose at their slowest pace in 1-1/2 years in the second quarter, the latest indication of benign inflation that could allow the Federal Reserve to cut rates on Wednesday for the first time in a decade.

This pushed 10-year US Treasuries down 2.5 bps to their lowest in a week at 2.037%

This followed data showing euro zone economic growth halved in the April-June period and inflation slowed sharply in July, although bond markets already pumped up by a months-long rally were little moved.

The headline inflation rate was the lowest in 17 months, heightening expectations for European Central Bank easing in September.

"The big picture is unchanged. The data pretty much supports the ECB signal that there is going to be easing in September," said Jan von Gerich, a fixed income strategist at Nordea.

Elsewhere, 10-year yields in the bloc were 4 to 6 basis points lower,,.

Last week the ECB set out plans for a package of stimulus measures but brought a halt to a bond rally by not cutting rates immediately.

Since then, risk aversion has drawn investors back to the safety of European government debt.

Irish bond yields, which jumped on Tuesday on no-deal Brexit fears, fell as investors returned. The 10-year yielded 0.108% , more than 6 bps lower on the day and fully reversing Tuesday's rise.

The Ireland/Germany 10-year bond yield spread stood at 54.7 bps after expanding to nearly 60 bps on Tuesday, the widest in eight weeks.

"The fundamentals of Ireland are otherwise quite strong. But there's no denying that they will be one of the biggest losers of a no-deal Brexit," von Gerich said.

ITALIAN STAGNATION

Italian yields dropped after data showed the economy stagnated in the second quarter.

The 10-year Italian bond yield fell nearly 4 bps to 1.542% . Last week, at the time of the ECB meeting, the yield had dropped as low as 1.38%. Shorter-dated Italian bond yields also weakened on Wednesday .

Whether big investors come back to the Italian bond market over the next few weeks will be a good guide to how strongly investors believe the ECB will resume quantitative easing.

Italian bond markets should be one of the main beneficiaries, said Cyril Regnat, a fixed-income strategist at Natixis.