Euro zone bonds set for strong week as safe-haven appeal resurfaces

Euro zone government bonds were ‌headed ​for a robust weekly performance on Friday, as investors dashed for the relative safety of sovereign debt, given their growing concern about the ability of AI-related companies to deliver a return on their vast spending.

Global bonds are heading for their strongest weekly performance since late May this week, with yields ‌on the sovereign debt of G7 economies down by an average of 7.7 basis points to 4.265%, according to LSEG data. Yields on German 10-year Bunds, the safe haven of choice for many investors in European assets, have fallen 8.1 bps this week to around 3.405% on Friday, while 2-year yields were down 1 bp at 3.068%.

Stocks have been rattled this week by mounting worry, particularly over the more heavily indebted companies in ‌the artificial intelligence sector, about the rising cost of capital. Government debt, which traditionally acts as a shock absorber for ructions in riskier assets, has been unable to perform this function for most of this ‌year, as the surge in energy and food prices as a result of the Middle East war has forced investors to price in the prospect of higher borrowing costs in the form of higher yields.

The correlation between Bunds and the STOXX 600, for example, has turned positive — meaning yields are more likely to fall when stocks fall and vice versa — this week for the first time since early August. This relationship reached its most negative on record in late September, according to LSEG data.

One of the ⁠major aggravating factors ​for bonds has been the persistent concern among investors ⁠about the long-term finances of developed-market governments. Yields on French bonds, which have been among the most harshly punished in the past few weeks, given the deep-rooted worry about France's ability to tackle its finances, were trading around 4.81%, up 2 bps on ⁠the day, but down 7.4 bps this week, in their largest weekly drop since early August.

The premium of French 10-year yields over Bunds , a reflection of the extra compensation investors want for the risk of lending to France, ​rather than Germany, was around 139 bps on Friday, having fallen from a 15-year high of nearly 160 bps on October 2. MARKETS WATCHING ECB SPEAKERS

In a nod to the volatility ⁠in the bond market of the past few weeks, Bundesbank President Joachim Nagel said on Friday in Bangkok the recent turmoil reflected a combination of higher inflation, resilient growth and rising capital demand from AI companies. European Central Bank President Christine Lagarde, Governing Council member Boris Vujčić ⁠and ​ECB Executive Board member Piero Cipollone will all speak at events in Bangkok in the coming 24 hours, which analysts said could help refine expectations for the central bank's next move on interest rates.

"ECB colour remains on the agenda with the IMF/World Bank annual meetings in Bangkok continuing today. Remarks by Lagarde, Vujčić and Cipollone are on the agenda today and could become intriguing for the near-term rates ⁠outlook, with the market's confidence growing for a 25bp hike in December," Hauke Siemßen, a strategist at Commerzbank, said. Money markets show traders do not believe the ECB will raise interest rates at its ⁠meeting this month, but see a near-100% chance of a ⁠rate rise in December and at least one more hike by next April.

Separately, the World Economic Forum could appoint Lagarde as its next chair as soon as next month, four people close to the organisation told Reuters, meaning she would step down early as ECB chief. Federal Reserve Chairman Kevin Warsh, who ‌was also in Bangkok this week, ‌voiced optimism on Friday about US economic strength, but gave no steer on the likely course of ​monetary policy.