Euro zone bond yields steady, trade tensions in focus

Eurozone government bond yields were steady on Monday, not far from recent record lows, as the latest escalation in U.S.-China trade tensions fuelled concern about the global growth outlook and bolstered demand for safe-haven debt. An increasingly bitter trade war between the world's two largest economies intensified on Friday, with both sides leveling more tariffs on each other's exports.

On Monday, U.S. President Donald Trump said China had called U.S. trade negotiators and want to come back to the negotiating table. While the latest headlines raised hopes of a de-escalation in trade tensions, analysts said concern about the long-term fallout for the global economy from a bitter dispute meant investors were unlikely to reassess central bank rate expectations just yet.

"The latest headlines suggest a slight de-escalation after the escalation ahead of the weekend," said Rainer Guntermann, a rate strategist at Commerzbank. "That explains why yields are a bit higher and risk sentiment is picking up." Most eurozone bond yields were flat to a touch higher on the day, having dipped in early trade.

Germany's 10-year Bund yield was steady at -0.67 %, while 30-year bond yields were 1 bps lower at -0.16% U.S. 10-year Treasury yields edged off their lowest since mid-2016 but remained sharply lower on the day.

"U.S.-China trade tensions are getting worse, not better," said James McCormick, global head of desk strategy at NatWest Markets, referring to Friday's developments. "While the announced retaliation by China looks measured, the details were targeted at sectors very important to the Trump administration – autos, agriculture, and oil."

Global trade tensions have stoked concern about the growth outlook this year, pushing bond yields in the euro area deep into negative territory as investors bet on central bank action to shore up growth and inflation. Germany's 10-year Bund yield has now spent 101 days in sub-zero yield territory, according to Refinitiv data.

Analysts said a report that the European Union is considering whether to ease its budget rules would likely limit any rally in eurozone bond markets. Signs in recent weeks that fiscally prudent eurozone economies such as Germany are looking into increasing spending to boost a frail economy have helped stall the relentless fall in bond yields.