Global growth worries bolster euro zone bond markets

Euro zone bond yields dipped on Friday, keeping recent multi-month lows in sight given nagging concerns about the economic growth outlook as the Delta variant of the coronavirus continues to rage worldwide.

Some concern that the U.S. Federal Reserve could be looking to pare back its bond-buying stimulus even as growth slows have also supported bonds in a week that has seen stock markets rattled by Fed taperingfears and worries that the global economic recovery is losing momentum.

Countries from Australia to Vietnam announced more drastic curbs and longer lockdowns for citizens on Friday, as authorities struggle to rein in Delta outbreaks.

“There’s a lot of talk about supply disruptions from Asia because of Delta variant disruption,” said Rabobank senior rates strategist Lyn Graham-Taylor.

“That idea that everything was going to get back to normal has faded and there’s a perception that we could now be at restrained level of growth for some time.”

Such views have supported demand for safe-haven bonds, with Germany’s 10-year Bund yield a touch lower around -0.50% DE10YT=RRon Friday. It stuck close to a six-month low hit earlier this month at -0.52% and was set to end the week around 3 basis points (bps) lower.

Worries that growth may be peaking and expectations that the ECB would maintain a heavy dose of monetary stimulus following its recent monetary policy review pushed Bund yields in Germany, the euro zone benchmark, almost 26 bps lower in July.

With many euro zone policy makers absent for the summer break, regional bond markets were expected to take their steer from global events and in particular the debate on the Fed’s next move.

The Fed will announce a plan in September to taper its asset purchases, likely starting in the first quarter of next year, according to a solid majority of economists polled by Reuters this month.

Across the euro area, most 10-year bond yields were little changed to slightly lower on the day.

Italy’s 10-year bond yield was down 1 bps at 0.56% IT10YT=RR, also not far off roughly six-month lows hit earlier in August.

There was an increasing focus on shifting German election polls as a Sept. 26 national election draws closer.

The Latest polls show Germany’s centre-left Social Democrats (SPD) have overtaken the Greens and are now closing the gap with Chancellor Angela Merkel’s conservatives.

“It seems unlikely that a coalition of two parties can form a government and thus, for the first time, a three-party coalition will probably have to be formed,” analysts at RBC Capital Markets said in a note.

“This implies that it is likely one of the more traditional alliances will have to be broken. The question is which one?”
Source: Reuters (Reporting by Dhara Ranasinghe; editing by Philippa Fletcher and Kim Coghill)