German bond yields slide on growth fears, spreads widen | MarketScreener


July 5 (Reuters) – German government bond yields tumbled on
Tuesday as renewed fears about the euro zone’s economic outlook
fuelled expectations of slower monetary tightening, while the
gap between German yields and southern European peers widened.

Stock markets fell and the euro sank to a two-decade low as
another surge in natural gas prices reignited worries about the
economy’s health.

Investors feared recession over inflation and scaled back
expectations about future European Central Bank (ECB) interest
rate rises.

Money markets are pricing in about 130 bps of ECB rate hikes
by year end, down from 140 bps on Monday.

German borrowing costs meanwhile are down by around 40 basis
points (bps) in three sessions.

Germany’s 10-year bond yield fell 15 bps to 1.172% on
Tuesday after jumping by 11 bps on Monday.

It hit its lowest since June 1 last week at 1.163%, after
reaching its highest since January, 2014 in mid-June at 1.926%.

“We are still a bit positive on Bund (prices) on
expectations that the ECB might not fulfil the expected monetary
tightening,” said Hetal Mehta, Senior European Economist at
Legal and General Investment Management (LGIM).

Bond prices move inversely to yields.

Activity in Italy and Spain’s services sectors slowed again
in June, amid faltering demand.

Italy’s 10-year government bond yield fell 6 bps to around
3.26%, while the spread between Italian and German 10-year
yields widened 6 bps to 208 bps. .

It has wobbled between 190 and 215 bps after the ECB pledged
its support for periphery in mid-June.

Spain and Portugal’s spreads also widened by around 3 bps
and 4 bps respectively.

The ECB’s biggest shareholder, Germany’s Bundesbank, laid
out its conditions for providing new support to the euro zone’s
most indebted countries on Monday after opposing such aid at an
emergency meeting last month.

Some analysts remained confident that the ECB would deliver
on its plan announced in mid-June to tackle fragmentation in
euro zone bond markets – an excessive widening of spreads
between core and peripheral yields that might hamper monetary
policy transmission across the bloc.

“We don’t expect spreads between core and peripheral bond
yields to widen or tighten too much from the current levels
before the next ECB meeting,” LGIM’s Mehta argued.

“Investors want to see first if the central bank comes up
with a credible anti-fragmentation tool,” she added.

Analysts flagged that the recent decline in nominal rates
had been partly driven by a drop in breakevens – a gauge of
inflation expectations measured by the difference in yield
between inflation-protected and nominal debt.

Germany’s 10-year breakeven rates were at 2.095% on Monday,
after hitting their lowest since Feb. 28 at 2.019% on Friday.
They have dropped by around 70 bps since the end of April.

(Reporting by Stefano Rebaudo; additional reporting by Lucy
Raitano, editing by Ed Osmond, William Maclean)



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