LONDON, Aug 28 ― The euro area's government bond yields edged back towards record lows today as a key part of the US Treasury curve inverted further, fuelling concern that a recession is coming.
Italy's bond yields steadied after posting their biggest one-day fall in almost two months yesterday as the country inched towards the formation of a new government.
Even the brighter tone from the euro zone's third biggest economy failed to trigger selling in safe-haven German bonds against a backdrop of growing concern about global growth and expectations for aggressive monetary stimulus.
The US Treasury yield curve ― as measured by the gap between two and 10-year bonds ― is at its most inverted since 2007 on fears that US/China trade tensions will tip the economy into recession. The US bond yield curve is widely regarded as a key recession indicator.
In Japan, 30- and 40-year bond government yields hit three-year lows today.
Euro zone bond yields edged lower in early trade with Germany's benchmark 10-year Bund yield at -0.70 per cent - within sight of recent record lows of -0.727 per cent.
“The rally in bonds in the US and Europe is continuing because expectations for a trade deal are moving further away,” said Antoine Bouvet, senior rates strategist at ING in London.
“The unpredictability of the trade conflict might push investors to price the worst outcome until they receive evidence that it can be avoided.”
Germany, the euro zone's benchmark issuer, is due to sell €3 billion (RM14 billion) of 10-year bonds later. It will follow a weak sale of 30-year German debt last week that was taken as a sign that appetite for holding bonds with deeply negative yields was waning.
Another test could come with a possible syndicated five-year bond deal from Finland, expected to be launched today. Analysts say the new bond is likely to be priced with a negative yield.
Italy's bond yields were little changed with the focus on talks between the ruling anti-establishment 5-Star Movement and opposition Democratic Party to form a new government.
Discussions between the two parties resumed today after running into trouble last night. Commerzbank said Italy's 10-year bond yield could soon test 1 per cent as political uncertainty clears. It fell to a three-year low of 1.124 per cent yesterday.
Elsewhere, a rally in Greek bonds continued following news on Monday that Greece will lift the last of its capital controls.
Greece's 10-year bond yield touched a fresh record low of 1.811 per cent. ― Reuters
