Global trade concern: German yields drop to six-week low, France and Belgium hits bottom
Belgium's 10-year government bond yield was down 7 basis points on Friday, its lowest level since early January at 0.64 percent, while the spread over Germany was at its tightest in four weeks at 37 bps.
German government bond yields dropped to six-week lows while Belgian and French borrowing costs hit their lowest levels. As early as January investors sought safe assets in the face of economic and global trade concerns.
Although the prospect of a trade war between the United States and China eased a touch on Friday, worries over slowing economic growth in Europe and cautious comments from European policymakers on future rate increases have held down yields in the bloc.
With German 10-year Bund yields hovering around the 0.30 per cent in recent weeks -- and dropping to a six-week low of 0.27 per cent on Friday -- investors have little choice but to go down the credit spectrum.
While Southern European yields have fallen this week, the recent Italian bond selloff means investors remain cautious so countries such as France, Belgium and, to an extent, Ireland have benefited most.
Belgium's 10-year government bond yield was down 7 basis points on Friday, its lowest level since early January at 0.64 per cent, while the spread over Germany was at its tightest in four weeks at 37 bps.
French 10-year borrowing costs were at their lowest levels this year at 0.61 per cent.
"Spreads have a tendency to tighten when rates move lower, as some investors who need yield can buy assets such as French debt to get a pick up compared to Germany," said Mizuho strategist Antoine Bouvet.
"The semi-core has the benefit that it doesn't have the political risk of Italy," he added. "Semi-core" is used to describe countries such as France and Belgium that are just below "core" eurozone members Germany and the Netherlands in the credit rating spectrum.
That said, Southern European debt did find some demand on Friday, with Italian 10-year yields dropping 6 bps to 2.586 per cent and the closely-watched Italy/Germany bond yield spread at its tightest in over a week at 232 bps.
"This is largely due to a lack of political events in Italy, and the focus being much more on trade wars," said Cyril Regnat, a fixed-income strategist at Natixis. "Also, investors are seeing the ECB minutes as dovish, this is the reason why markets are bullish on bonds."
The European Central Bank will keep rates at a record low for as long as needed to raise inflation, and its interest rate guidance should be seen as "open-ended", policymakers concluded in June, according to minutes of their meeting published on Thursday.
Southern European countries are seen as the biggest beneficiaries of loose monetary policy - so Spanish and Portuguese yields were also 2-3 bps lower on the day.
But they are well above the year's lows, hit in March and April, before the arrival in a government of a coalition of anti-establishment parties in Italy hurt the debt of all three countries.
It may have also helped that risk sentiment improved overall and stock markets strengthened, with U.S. Treasury Secretary Steven Mnuchin saying the United States and China could reopen talks on trade.
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)