Euro zone bond yields dragged down by growth concerns, Brexit woes

Eurozone government bond yields fell on Tuesday as worries over world economic growth, trade tension and a Brexit impasse bolstered demand for fixed income. Markets have also grown convinced that the stuttering global and European economy will see the European Central Bank maintain a dovish stance at its policy meeting later this week.

Data on Monday showing China's economic growth slowed to a 28-year low in 2018 were followed by the International Monetary Fund's trimming its 2019 and 2020 world growth forecasts. The IMF cited Italy as one of the main risks to growth because of its spending plans. The Italian newspaper La Repubblica reported on Tuesday that the European Commission will cut its 2019 growth forecast for Italy to 0.6 per cent or "slightly" below.

Brexit uncertainty and concern about the U.S./China trade war, after U.S. President Donald Trump called on China to seek a "real deal", added to the risk-off sentiment and boosted safe-haven debt. Yields on most 10-year government bonds were down two basis points on the day. Germany's 10-year bond yield dipped to 0.225 per cent, moving further away from Friday's one-month high close to 0.28 per cent.

Concerns that the eurozone economy may weaken more than expected has boosted bond markets early in 2019, leading to doubts the ECB will raise interest rates anytime soon. The ZEW economic sentiment survey due later could offer some clues on the economic outlook before Thursday's ECB meeting.

ECB chief Mario Draghi said last week the slowdown could last longer than expected and that the economy still needed support. The region was not heading for recession, he added. Francois Savary, CIO at wealth manager Prime Partners, still expects the ECB to raise rates by the end of the year, despite signs that doubts are growing among policymakers.

"Clearly the ECB is asking itself if they really need to proceed with an interest rate hike," Savary said. "Draghi has been clear that he wants to be more flexible and slower in the way they assess monetary policy." Eurozone money pricing suggests investors price roughly a 40 per cent chance the ECB will raise its deposit rate 10 basis points by the end of this year. It is now minus 0.40 per cent.

The focus is also on Spain which is expected to complete a sale of new 10-year bonds via a syndicate later in the session. On Monday, Spain mandated banks for the deal, which follows a string of successful deals from the likes of Italy and Portugal already this month. "The experience from last week's Italy deal is encouraging for Spain," said Commerzbank rates strategist Christoph Rieger. "We see chances of Austria joining Spain in launching a new 10-year bond."