German bond yields still negative after trade gloom hits PMI

Credit: REUTERS/KAI PFAFFENBACH

By Virginia Furness

LONDON, May 23 (Reuters) - Germany's 10-year government bond yield fell further into deeply negative territory on Thursday after a survey showed business activity in the bloc's largest economy fell in May, adding further evidence that trade wars are dampening economic growth.

While French business activity jumped to its strongest level in six months, German business activity undershot expectations, prompting a further though brief fall in German government bond yields, IHS Market's latest Purchasing Managers' Index (PMI) showed.

It has been a dismal few months for the global economy with the trade conflict sending a frisson through markets and chilling business activity across the world.

Europe in particular has seen its recovery sputter and Germany’s industrial sector — the continent’s engine room — has actually gone into reverse.

Activity in Germany's services and manufacturing sectors fell in May, the survey showed on Thursday.

IHS Markit's flash PMI for manufacturing fell to 44.3 from 44.4 in April, the fifth monthly reading in a row below the 50 mark that separates growth from contraction.

Germany's 10-year government bond yield fell back below -0.10% after briefly rising to -0.086%, sliding back down towards the recent 2-1/2 year low of -0.132% DE10YT=RR.

French 10-year yields also fell to 0.29%, down 1.5 basis points FR10YT=RR after data from IHS Market showing that its PMI rose to 51.3 points, up from 50.1 points in April.

The German economy returned to growth in Q1, final data confirmed earlier in the session, and had risen 0.4% quarter on quarter, driven by stronger household spending and a pick-up in construction.

European parliamentary elections begin on Thursday with voters heading for the polls in the UK and Holland. Initial results will be announced on Sunday evening.

The rise of populist, eurosceptic parties has thrust the European elections, normally a dull affair mostly ignored by global markets, to the forefront of portfolio managers' list of concerns.

Investors are weighing the chances of eurosceptic groups grabbing a third of the seats.

Britain's last-minute participation in the elections will boost support for eurosceptic groups in the European Parliament by about 1.5 percentage points, according to Goldman Sachs estimates. Overall, they see support for the populist parties rising to 20-25% from around 15%.

U.S. Treasury yields also slipped lower after Fed minutes showed that rates would likely remain at current levels for some time, with the central bank's patient stance reiterated.

"Members observed that a patient approach ... would likely remain appropriate for some time," with no need to raise or lower the target interest rate from its current level of between 2.25 and 2.5 percent, the Fed on Wednesday reported in the minutes of its April 30-May 1 meeting.

Ten-year U.S. Treasury yields extended Wednesday's three basis point fall by a further two basis points to trade at 2.37 percent US10YT=RR.

(Reporting by Virginia Furness; additional reporting by Tommy Wilkes Editing by Raissa Kasolowsky and Andrew Cawthorne)

((Virginia.Furness@thomsonreuters.com; +44207 542 5477;))

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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