German Bund yields approach record lows as growth outlook dims

Thu Jun 26, 2014 11:40am EDT

* German 10-year yields dip near record lows

* U.S. consumer spending data fails to meet expectations

* Growth forecasts slashed in Italy, Austria

* Moody's says Spain tax reforms troubling (Updates with reaction to U.S. data)

By Marius Zaharia

LONDON, June 26 (Reuters) - German Bund yields edged towards all-time lows on Thursday as a weakening growth outlook for the euro zone and United States cemented the view that central banks will keep supporting their economies for a prolonged period.

A second downwards revision of Q1 U.S. economic growth on Wednesday, followed by below-forecast consumer spending data on Thursday softened expectations that the Federal Reserve would reverse course on its ultra-easy monetary policy any time soon.

Weak data out of the euro zone earlier in the week had a similar impact, boosting the ranks of those who believe the European Central Bank may eventually start buying assets.

"The power of the ECB is very high, and the fact they can come with unlimited support to peripheral markets is still making investors scared of taking short positions," said Alessandro Giansanti, senior rates strategist at ING.

German 10-year yields dipped 2 basis points to hit 1.24 percent, nearing the all-time lows of 1.13 percent seen in the summer of 2012, at the height of the euro zone debt crisis, when investors sought refuge in top-rated assets.

Some safe-haven appeal remains for Bunds as a Sunni insurgence in Iraq has raised worries about the global growth outlook, although oil prices eased somewhat from nine-month highs on Thursday.

Traders say large coupon payments and redemptions next month will offer further support for euro zone bonds. German bonds are likely to be one of the main beneficiaries of the reinvested cash if the conflict in Iraq escalates.

SCARY RALLY

The ill-health of the euro zone economy has helped support demand for sovereign debt across the bloc despite the fact that the credit worthiness of those bonds was deteriorating.

An Italian employers' lobby and an Austrian think tank both slashed their growth forecasts for their countries on Thursday, while ratings agency Moody's said Spain's plans for broad tax cuts weighed on its credit rating as they put budget deficit targets at risk.

"I find it scary," said Guido Barthels, CIO at Luxembourg-based Ethenea. "It's a big concern for me because that means we are depending on the policy of the central banks and they are known for making policy mistakes from time to time."

Italian and Spanish 10-year yields edged down to 2.72 percent and 2.64 percent. They were just a tad above record lows hit earlier this month.

Not all investors are in awe of peripheral bonds, however. Barclays' head of asset allocation research Jim McCormick said he has removed his long-standing overweight position in them.

"The truth is there's plenty of long-term risks around debt sustainability in these bonds, and growth is starting to disappoint a little," McCormick said. "If you look at peripheral bonds in the last four or five years, any stress tends to be led by or coincides with a weakening in the growth story." (Additional reporting by John Geddie; Editing by Hugh Lawson)

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