German bonds supported by coronavirus unease, dire economic data

Credit: REUTERS/Phil Noble

By Dhara Ranasinghe

LONDON, April 3 (Reuters) - Borrowing costs in the euro area were mostly steady to a touch lower on Friday, as bleak news in terms of both the coronavirus outbreak and the economic outlook weighed on investor sentiment and supported higher-rated debt markets.

Global coronavirus cases surpassed 1 million on Thursday with more than 52,000 deaths as the pandemic further exploded in the United States and the death toll climbed in Spain and Italy.

In a fresh reminder of the havoc the outbreak is having on the economy, surveys showed that German services firms shed staff at the fastest rate in almost 23 years in March and Italy's service sector shrank at the fastest rate in more than 22 years.

In Italy, the IHS Markit Business Activity Index for services dived to 17.4 from 52.1 in February, way below the 50-mark that separates growth from contraction.

While yields on high-rated bonds in Germany held lower after the data, peripheral bond yields and their spreads over euro zone benchmark issuer Germany came under some pressure.

"Certainly from the price action we can see the market wasn’t expecting the data to be quite this bad, although for now the reaction has been localised to Italy," said Peter McCallum, rates strategist at Mizuho.

"Poor data is becoming the new norm, but seeing a 1-handle PMI is still alarming and demonstrates how this contraction is greater than for the GFC (global financial crisis)."

Italy's 10-year bond yield was 3 basis points higher on the day at 1.51% IT10YT=RR, while the gap over German Bund yields stood at 193 bps DE10IT10=RR versus 184 bps late on Thursday.

Germany's 10-year bond yield was down a basis point at -0.44%, holding well below highs hit last month at -0.14%.

"With regard to Bunds, the ECB's depo rate increasingly appears to be acting as a floor for the 10-year yield and the central bank’s ample bond purchases are effectively capping it," analysts at UniCredit said in a note, referring to the European Central Bank's -0.50% deposit rate.

"Key rate cuts, QE (quantitative easing), fiscal packages and an express slowdown in economic activity should all be largely absorbed by core bond markets by now."

A key market gauge of euro zone inflation expectations rose above 1% for the first time in almost a month EUIL5YF5Y=R.

Monthly U.S. non-farm payrolls data due later in the day was in focus although the numbers will not fully reflect the carnage being inflicted by the virus outbreak, analysts said.

Markets were also focused on what action the euro zone will take next to buffer economies from the pandemic.

Euro zone states that need aid from the bloc's bailout fund to tackle the outbreak should get it quickly but first receive visits from officials proposing policies like during the euro zone crisis, Germany's finance minister said on Friday.

Germany's Bund yield, weekly move IMAGE

(Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne and Susan Fenton)

((; +442075422684;))

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


More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.