Euro zone bonds pause after rally, first Dutch green bond in focus

Credit: REUTERS/ARND WIEGMANN

Government bond yields in much of the euro zone steadied above recent multi-year lows on Tuesday, with investors still reluctant to sell fixed income given heightened concern about economic growth and trade tensions.

By Dhara Ranasinghe

LONDON, May 21 (Reuters) - Government bond yields in much of the euro zone steadied above recent multi-year lows on Tuesday, with investors still reluctant to sell fixed income given heightened concern about economic growth and trade tensions.

There was some focus on the Netherlands, which launched its first green bond amid signs of strong demand. The new 20-year bond is the first green issue from a triple-A rated sovereign.

Bond issues in general from the single currency bloc have seen strong demand this year given a backdrop of weak economic growth and expectations that the European Central Bank will maintain an ultra-easy monetary policy stance for some time.

After sharp yield falls last week on renewed U.S./China trade tensions and Brexit uncertainty, bond markets have stabilised just ahead of the next big risk event - European parliament elections that kick off from Thursday.

In addition, a perception that central banks will have to take further action to shore up growth and concern that global trade tensions may become protracted mean any rise in yields appears limited for now.

Australia's central bank said on Tuesday it will consider cutting interest rates next month.

"The market was caught by surprise last week by the sudden deterioration in the U.S./China trade talks and as things stand there is reason to feel pessimistic," said John Davies, G10 rates strategist at Standard Chartered Bank in London.

"So now we are in a bit of wait-and-see territory here, with political risk this week quite big."

Germany's benchmark 10-year government bond yield was up just 1 basis point on the day at minus 0.08%, off 2-1/2 year lows but still down almost 10 bps this month DE10YT=RR.

French and Dutch 10-year bond yields have also nudged up from last week's 2-1/2 year lows but remain well below levels they started this year at FR10YT=RR, NL10YT=RR.

Australia's central bank said on Tuesday it will consider cutting interest rates next month and the Organisation for Economic Co-Operation and Development (OECD) trimmed its global economic growth forecasts for 2019.

The OECD's euro zone growth forecasts however were nudged higher.

"The market seems hesitant to take a brighter outlook on the economy even though the data is stabilising and the OECD euro zone growth forecasts were marginally higher," said Commerzbank rates strategist Rainer Guntermann.

Elsewhere, there were signs of solid demand for the new Dutch green bond.

Green bonds make up a small fraction of the overall bond market, but interest has soared as banks, sovereigns and companies look to tap into increasing investor appetite.

"It shows that issuers and investors are increasingly interested in the broad ESG (environmental, social, governance) universe and it's just going to grow from here," said Ross Hutchison, a bond fund manager, at Aberdeen Standard Investments in Edinburgh, referring to the Dutch green bond sale.

Germany's 10-year Bund yield, monthly move in bpshttps://tmsnrt.rs/2EneF3l

(Reporting by Dhara Ranasinghe Editing by Andrew Heavens and Andrew Cawthorne)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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