Eurozone bond yields fell on Friday after surveys showed private-sector growth slowed in the currency bloc, keeping pressure on the European Central Bank to stimulate the euro zone's fragile recovery. A fall in oil prices to near four-month lows also added to concern that the ECB may struggle to raise inflation to its goal of just under 2 percent.
Eurozone business activity started the second half weaker than expected, hit by Greece's near-bankruptcy. Markit's flash PMI fell to 53.7 this month from June's four-year high of 54.2. A Reuters poll had predicted a more modest dip to 54.0. A softer-than-expected US housing report and an earlier survey on Friday showing Chinese manufacturing contracted by the most in 15 months amid a persistent downtrend in commodities, underpinned the rally in government bond markets.
Analysts said the weak data were a bad omen for next week's euro zone inflation print, all of which conspires to up the ante on the ECB to supercharge its bond-buying quantitative easing scheme. Top-rated German bond yields - the bloc's benchmark - fell 5 basis points to a three-week low of 0.66 percent. Yields on riskier bonds in the bloc's southern periphery were also down.
Under normal circumstances, weak data would prompt investors to cut risk and take refuge in safe-haven bonds. But the prospect of more central bank stimulus has altered trading strategies. "We've had a weak set of PMIs this morning and weak home sales out of the US And a lot of the commodities are coming off so this bounce in oil prices that we were all expecting might not happen," said Rabobank strategist Lyn Graham-Taylor. "So to some extent people think the ECB will just do more bond buying ... which potentially they could, so they bid the periphery too."
Italian, Spanish and Portuguese yields were down 4-7 bps at 1.88 percent, 1.92 percent and 2.54 percent, respectively. Irish bonds were the top performer, with yields down 9 bps at 1.29 percent after the country's debt agency said on Thursday it may ease its funding requirements from 2018 to 2020 via bond buy-backs and switches. "By extending maturity, Ireland has improved its fundamentals, and if the Irish curve is smoother then there may more interest in their bonds from relative value investors, so overall this is a smart move from the NTMA (debt agency)," said Mizuho strategist Peter Chatwell. Greek bonds bucked the downward trend, with 10-year yields nudging up 3 bps to 11.50 percent.
Athens does not yet qualify for the ECB's QE scheme, but even when it does, purchases are likely to be too small to push the country's borrowing costs low enough to regain market access soon. Greece starts talks with its international creditors over a third bailout deal on Friday, having passed a second set of reforms demanded as part of the deal earlier this week.