German bond yields hit five-week low as growth fears bite

But aggressive market rate hike bets have been dialled back in the face of mounting growth worries. Recent sharp falls in European yields have been echoed in the U.S. Treasury market, with a key part of the yield curve stuck in inversion territory for a second day in a sign that bond investors sense heightened recession risks.

Germany's government borrowing costs fell to a five-week low on Wednesday as mounting concern about a darkening economic outlook drove investors into safe-haven debt. Two-year bond yields in Germany - the euro's benchmark bond issuer - were last down 7.5 basis points (bps) on the day at 0.36%, having touched a five-week low at 0.351%.

They are down over 30 bps so far this month, while 10-year Bund yields are about 18 bps lower. Concern that aggressive central bank rate hikes will slow growth, alongside a fresh surge in European gas prices, has triggered something of a turning point for bond markets, hit in the first half by soaring inflation and rising official rates.

"You can see the narrative is shifting and that we are heading towards a recession, but we know that central banks cannot back out of the rate hiking cycle so I would expect this volatility to continue," said Pooja Kumra, European rates strategist at TD Securities in London. Reflecting the recent volatility, most bond yields had edged higher in early trade before moving back down.

Germany's 10-year Bund yield also fell to a five-week low at around 1.15%. It was down around 3.3 bps, as were most other 10-year borrowing costs across the currency bloc . The European Central Bank is now widely tipped to raise rates later in July for the first time since 2011. But aggressive market rate hike bets have been dialed back in the face of mounting growth worries.

Recent sharp falls in European yields have been echoed in the U.S. Treasury market, with a key part of the yield curve stuck in inversion territory for a second day in a sign that bond investors sense heightened recession risks. Mike Kelly, head of multi-asset at PineBridge Investments, said demand to increase exposure to bonds with longer-dated maturities was growing again.

"Since (Federal Reserve chief Jerome) Powell two weeks ago made it clear they are not trying to create a recession but are willing to take that recession risk, duration has been on the move," he said. "Bond markets are sniffing out that recession is coming."

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)