Euro zone bond yields sink further as trade war steps up

Eurozone government bond yields slid back towards recent lows on Tuesday as investors remained cautious on risk after the U.S. branded China a currency manipulator, escalating their trade war. Safe-haven bond yields fell, while global stocks extended already substantial losses on Tuesday after Washington designated Beijing a currency manipulator.

Eurozone bond yields extended Monday's declines, which came after China allowed its currency to weaken, pushing both Dutch 30-year and Irish 10-year bonds below zero for the first time. Analysts say the escalation increases pressure on the U.S. Federal Reserve to ease monetary policy. The Fed cut U.S. interest rates last week as insurance against the effects of "simmering" trade tensions.

Interest rate futures now show traders see nearly a 40% chance the Fed will cut rates half a percentage point next month, up from less than 2% on Friday and 30% earlier Monday. Markets are still pricing in a 100% chance that the European Central Bank will cut rates by 10 basis points at its next meeting.

China's official Communist Party newspaper said on Tuesday the United States was "deliberately destroying international order", a day after Washington branded Beijing a currency manipulator.

ITALY PASSES SECURITY LAW

Italian government bond yields fell over three basis points across the curve, after the Italian government won a confidence vote in the Senate on Monday, prolonging its tenure, for now at least. It would have had to resign had it lost the motion[nL8N2514M9. "Italian BTPs are likely to trade upon a relief rally today but government tensions going into the 2020 budget process in September should cap any further gains, at least until the makeup of the ECB's easing package is known with more certainty," Mizuho rates strategists said in a note on Tuesday.

Italian bond yields slid back towards their lowest since 2016, out-performing the rest of the eurozone. Italy's 10-year government bond yield was last at 1.53%. Some positive data from Germany did nothing to change the direction of bond yields. German industrial orders rose more than expected in June, data showed on Tuesday, and the Economy Ministry said the downward trend for the industry in Europe's biggest economy had slowed in the second quarter.

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