Euro zone yields drop again as equity market's mood sours

Eurozone government bond yields slipped back towards record lows on Thursday as economic indicators and corporate earnings deepened gloom on the global economy and increased bets on interest-rate cuts by major central banks. Sliding Japanese exports, an unexpected rate cut in South Korea, weak results from trade-related CSX Corp and missed targets for Netflix made for bleak headlines that rippled through markets across the world.

This, in turn, boosted bets for further monetary policy easing from major central banks. The focus was on the U.S. Federal Reserve, where speculation centres around whether rates will be cut by 25 basis points or 50 basis points in July. A Reuters poll showed economists expect the Bank of Japan's next policy move will be a rate cut, too. Eurozone money markets show a September rate cut by the European Central Bank is fully priced in.

"The ECB will likely present more dovish forward guidance next week, allowing rate expectations to move lower again," said Mizuho strategist Peter Chatwell. "However, despite the ECB's efforts, we strongly doubt that monetary stimulus will be effective in generating a sustained increase in inflation."

German 10-year bond yields retreated below the -0.30% mark once again, off last week's high of -0.224%, ending a brief spell of optimism last week that led to this safe-haven debt's worst weekly selloff in nearly 18 months. Most other eurozone government bond yields were also 1 to 2 bps lower, having already dropped about 4 to 6 bps on Wednesday.

French 10-year government bond yields fell further into negative territory. They were last 2 bps lower at -0.056 %, while the Belgian equivalent was heading towards zero. France is set to tap its short-dated bonds later on Thursday in an auction. Spain will also hold a bond auction.

Some investors may be baulking at the deeply sub-zero yields. An auction of German 30-year debt on Wednesday barely generated enough demand to cover the targeted size of 1 billion euros. Demand at a 10-year Bund auction last week fell short of the 4 billion-euro target.