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Easing tensions over German economy keep bond yields steady

Easing tensions over German economy keep bond yields steady
Bond yields in the bloc's top-rated economies have fallen sharply this year as a string of weak economic data and cuts to 2019 growth forecasts.

Eurozone government bond yields were mostly steady on Thursday, with data showing Germany just escaped recession in the final quarter of 2018 preventing a further drop in borrowing costs.

Bond yields in the bloc's top-rated economies have fallen sharply this year as a string of weak economic data and cuts to 2019 growth forecasts prompted investors to reassess both the economic and monetary policy outlook. But with negative news now priced into the market and benchmark German 10-year bonds yields trading close to their lowest levels in over two years, the bond market appeared to be on hold.

Germany's economy grew by 0.0 per cent quarter-on-quarter in the final quarter of 2018, data showed, compared with a Reuters forecast for growth of 0.1 per cent. It escaped recession by the narrowest of margins after contracting in the July-September period for the first time since 2015. "The whisper estimate was even lower, so that's why the immediate reaction was a rise in yields," said Norbert Wuthe, rates strategist at Bayerische Landesbank.

"There are basically two things weighing down yields at the moment -- Brexit uncertainty and, in the past six weeks, increased attention to negative data surprises and their possible repercussions for the ECB (European Central Bank). Germany's 10-year Bund yield was last trading at 0.12 per cent, little changed on the day, having briefly risen to 0.133 per cent after the data.

Most other 10-year bond yields in the bloc were flat to marginally lower on the day. The focus remained on Spain, where bond yields were broadly steady in early trade. Spain's parliament rejected a draft 2019 budget on Wednesday after Catalan separatists turned their back on the government, pushing the country close to an early national election. "Elections would not concern us in the long-term, as whether they take place or not, there is still uncertainty either way," said Peter McCallum, rates strategist at Mizuho.

He said snap elections would likely spark a sell-off in Spanish bonds, which should recover if fresh polls resulted in a centre-right coalition and a more market-friendly fiscal policy.

(With inputs from agencies.)

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