German 10-year bond yields fell back towards 2-1/2 year lows on Friday, while French and Spanish yields were set for their biggest weekly drop in two months as growing concern over trade, global growth and Italy boosted higher-rated debt markets.
There was some respite for Italian bonds, with yields down as much as six basis points. Analysts said this was more down to position covering ahead of the weekend than any major easing in concern about Italian risks. They noted that even with the recovery in Italian bonds, demand for safe-haven bonds remained robust in a sign of the underlying nervousness among investors.
An escalation in trade tensions between the United States and China, the world's two biggest economies, has exacerbated concern about global growth, sparking a fresh rally in bond markets this week and pushing yields lower as prices rise. Tough words on trade from China's media on Friday drowned out upbeat news on the U.S. economy and corporate earnings, pushing Germany's benchmark 10-year Bund yield towards Wednesday's 2-1/2 year low of minus 0.13%.
U.S. Treasury yields, which rose on Thursday after strong U.S. data, also fell while renewed uncertainty over Brexit helped push down British gilt yields -- spilling over into other safe-haven debt markets. In the euro area, most 10-year bond yields fell one to two basis points.
French and Spanish 10-year bond yields were set for their biggest weekly drop in around two months, down seven and 12 bps respectively. Those moves are part of steep falls across major bond markets this year as weaker global growth and a shift to a more dovish stance from central banks creates a favourable backdrop for fixed income.
"Bond markets in general, especially (German) Bunds, are telling us they don't see many good things going on in the next one-two years," said Neil Dwane portfolio manager and global strategist at Allianz Global Investors. Renewed concern about Italy, the euro zone's third-biggest economy, has only fuelled demand for safe-haven bonds this week.
Italian Deputy Prime Minister Luigi Di Maio said on Friday he was not worried over possible EU sanctions in case of violation of fiscal rules, as he was confident European leadership would change after this month's European Parliament elections. Despite some efforts by officials to reassure markets, investors have been on edge since Salvini said on Tuesday that Rome should be ready to break an EU deficit ceiling of 3% of gross domestic product and push debt to 140% of GDP if needed to fight unemployment.
"I don't see that anything has fundamentally changed in Italy," said Pooja Kumra, European rate strategist at TD Securities. "You do see a lot of pessimism in the market and that's reflected in the level of Bund yields."
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