German bond yields fall for sixth day running; PMI’s show Europe’s recovery faltering

By Elizabeth Howcroft

LONDON, Aug 21 (Reuters)Core European government bond yields fell further on Friday, with Germany’s 10-year Bund rate below -0.5%, against a backdrop of rising COVID-19 infections and a faltering economic recovery.

Safe-haven government debt has rallied this week as central bank stimulus, doubts about the economic recovery in the United States, and global risk-aversion due to U.S.-China tensions pushed yields back towards their early-August lows.

Euro zone PMI data showed that economic recovery in the region slowed in August, particularly in services, as last month’s post-lockdown boost effect wore off.

“Positive effects from reopening economies are fading out in the service sector, confirming that the recovery will not be V-shaped,” said ING’s euro zone economist Bert Colijn, adding that the economic recovery is still “clouded by uncertainty”.

A full bounceback from the euro zone’s deepest recession on record will take two years or more, according to a recent Reuters poll of economists.

France set a new post-lockdown record high for daily coronavirus infections on Thursday, and cases are also surging in Spain.

Most core yields were down one to two basis points, but riskier Italian yields were up by around one basis point IT10YT=RR.

Germany’s 10-year Bund yield was at -0.51% at 1019 GMT DE10YT=RR, in its sixth consecutive day of falls and set for its longest falling streak since January this year, when markets were first grappling with the threat of the coronavirus pandemic and the European Central Bank was more dovish than expected.

Germany and France said on Thursday that they would coordinate their coronavirus-related travel restrictions. German Chancellor Angela Merkel said she wanted to avoid closing borders again and that there is a desire in Europe for a common approach to the virus.

RBC rates strategists said that a tightening of lockdown restrictions and changes in consumer behaviour due to the resurgence in coronavirus cases across Europe would “almost certainly” have an economic impact in September.

Minutes from the ECB’s July meeting showed that some policymakers cautioned against a further increase in the bank’s emergency bond-purchasing programme.

Bank of America economists wrote in a note to clients that they had cut their euro area inflation forecast further below consensus, saying the upward pressures that had emerged during lockdown have corrected lower.

They also expect a top-up of the ECB’s emergency purchase programme, probably in December.

“That will be necessary to accommodate the economy,” they wrote. “But it will not suffice to tackle long-term inflation dynamics and faltering expectations. More and longer policy support is needed, urgently.”

The five-year, five-year forward – a key measure of euro zone inflation expectations – continued to dip down from its recent six-month highs EUIL5YF5Y=R.

German 10-year yield change

(Reporting by Elizabeth Howcroft Editing by Mark Heinrich and Christina Fincher)

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