UPDATE 3-Euro zone bond yields decline, benchmark German Bund yields see biggest fall in over a week

Most eurozone government bond yields fell on Friday after data showed eurozone business growth almost ground to a halt this month while activity in the dominant services industry rose at a much weaker pace than expected. Safe-haven German government bond yields had their biggest daily fall in over a week.

In her first policy speech as ECB President, Christine Lagarde said the eurozone needs to create more of its economic growth at home if it is to withstand weakness abroad and become more balanced internally. IHS Markit's flash composite Purchasing Managers' Index, seen as a reliable guide to economic health, was 50.3, down from October's 50.6 and creeping towards the 50 marks separating growth from contraction.

After a relatively lacklustre week in regional debt markets, driven by headlines related to U.S.-China trade relations, the focus returned to the eurozone economy. "The PMIs were a bit of a mixed bag, some elements were constructive and others disappointing," said Andy Cossor, rates strategist at DZ Bank.

"If you take the eurozone as a whole, manufacturing was a bit better but the services sector was weaker, which on balance is a sign of an economy that is not firing on all cylinders." Ten-year bond yields across the euro zone's higher-rated bond markets were down 3-4 basis points each.

Germany's benchmark 10-year bond yields saw their biggest decline in over a week and were last down 3.7 bps at -0.361 %, nearing almost three-week lows hit earlier this week. Analysts said Lagarde's speech did not offer any new hints on the monetary policy outlook while continuing to stress the need for fiscal policy to play a greater role.

Lagarde did not discuss monetary policy, merely saying the central bank would continue to do its part to support the eurozone economy. "For an ECB president who's trying to be consensus-driven, it was as expected and didn't contain anything new," said Peter Chatwell, head of rates strategy at Mizuho.

"But one reason bonds have rallied is not just because of poor data today but also because Lagarde has made reference to monetary easing being the ECB's main tool." The ECB monetary policy under Lagarde is likely to stay the same for the next six to nine months, according to Mohit Kumar, managing director at Jefferies International.

Elsewhere, in southern Europe, borrowing costs, on the other hand, increased slightly, with Italy's 10-year bond yield up 1.3 bps at 1.295%. Last week sovereign borrowing costs in Germany and France saw sizeable weekly declines, in contrast to southern European countries, whose debt has come under heavy selling pressure.

 

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