German bond yields plumb record lows as pressure grows on ECB to act

Credit: REUTERS/RALPH ORLOWSKI

Core German government bond yields fell to record lows on Thursday, dragging a wide swathe of European yields lower as a streak of dismal economic data prepared the ground for a key European Central Bank policy meeting later in the day.

By Saikat Chatterjee

LONDON, July 25 (Reuters) - Core German government bond yields fell to record lows on Thursday, dragging a wide swathe of European yields lower as a streak of dismal economic data prepared the ground for a key European Central Bank policy meeting later in the day.

German business morale deteriorated more than expected in July, hitting its lowest level since April 2013, the monthly Ifo institute survey showed on Thursday. That followed a flash Purchasing Managers' Index (PMI) reading on Wednesday that showed business growth across the euro zone has been much weaker than expected this month.

Although a majority of economists in a Reuters poll expect a deposit rate cut only in September, weak data has raised pressure on ECB officials and sent core German bond yields deeper into negative territory.

On Thursday, benchmark 10-year German Bund yields DE10YT=TWEB fell to a record low of minus 44.3 bps, more than 4 bps below the ECB's deposit rate at minus 40 bps.

"Today the Ifo isn't a surprise after yesterday's data, and it adds to the ongoing deterioration," said Michael Leister, rates strategist at Commerzbank.

"We are calling for rate cuts and it is worthwhile keeping in mind that it is also about QE (asset purchases), which is moving into market focus."

Money markets are now pricing in around a 50% chance of a 10 basis point rate cut by the ECB at that meeting, while a 10 bps cut is fully priced in for September's meeting. ECBWATCH

PERIPHERY RALLY

A stellar first half for bond markets in Europe got fresh legs after ECB President Mario Draghi's June speech in Sintra, Portugal, where he flagged downside risks to the euro zone economy had not increased over that period.

German yields are down by more than 70 bps since then, while yields in the peripheral economies such as Italy and Portugal are down by more than 100 bps over that period. The euro EUR=EBS has weakened by nearly 2% since then.

Increasingly negative yields in the core European bond market has forced investors to buy relatively higher yielding debt in peripheral economies such as Greece and Italy.

Swiss 50-year borrowing costs fell below 0% on Thursday for first time since August 2016, meaning Switzerland's entire government bond market now trades with negative yields.

On Thursday, yields on benchmark 10-year Greek government debt GR10YT=RR fell back below 2%, meaning borrowing costs for an economy that once faced a chaotic exit from the euro zone are cheaper than for the United States US10YT=RR, the world's biggest economy and bond market.

"Yesterday's PMI misses raise the risk that the ECB delivers easing ahead of schedule today, rather than providing a cutting bias to the forward guidance," Peter Chatwell, head of rates strategy at Mizuho said in a daily note.

European Bond Returnshttps://tmsnrt.rs/2Md608w

Greek 10-year borrowing costs under US rateshttps://tmsnrt.rs/2Me5k2H

(Reporting by Saikat Chatterjee; Additional reporting by Virginia Furness; Graphic by Sujata Rao; Editing by Catherine Evans)

((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713; Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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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