August 15, 2019 / 4:00 PM / 3 months ago

UPDATE 1-Euro zone bond yields slide as expectations of ECB easing build

(Updates with comment and context)

By Dhara Ranasinghe

LONDON, Aug 15 (Reuters) - A slide in euro zone bond yields accelerated on Thursday after a report that the European Central Bank’s Olli Rehn sees the need for a significant easing package in September.

Italy’s 10-year government bond yield fell to a near three-year low as prices shot higher, and Germany’s 10-year bond yield sank to a fresh record low.

Two analysts told Reuters that Rehn’s comments to the Wall Street Journal had fuelled expectations for aggressive ECB easing soon, adding momentum to a huge bond market rally.

“The Rehn comments are definitely the catalyst behind the latest bond yield falls,” said Peter Chatwell, head of rates strategy at Mizuho.

“He is saying there is a need for a significant package in September from the ECB.”

The ECB is widely expected to cut interest rates by at least 10 basis points when it meets next month and possibly flag a fresh round of asset purchases to boost economic growth and below-target inflation.

In late trade, 10-year bond yields were sharply lower across the board.

Germany’s 10-year yield fell over 5 basis points to a record low at -0.706%. Two-year German yields took a step closer towards record lows hit in early 2017, falling to as low as -0.912%.

The market move was most marked in Italy, where expectations for central bank policy action have overshadowed rising political risks at home.

Italy’s 10-year bond yield fell almost 20 basis points to 1.328%, its lowest level in almost three years.

“The only game in town is the central banks, hence the bond markets are rallying,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

The slide in euro zone bond yields comes in a week when investor fears about world recession risks have risen.

Risks from Brexit to Italian political uncertainty and turmoil in Hong Kong have added to the pessimism.

The U.S. yield curve from 2- to 10-year bond yields inverted on Wednesday for the first time in 12 years in what is widely regarded as key recession indicator.

The U.S. curve has inverted before every recession in the past 50 years, offering a false signal just once in that time.

Reporting by Dhara Ranasinghe; Additional reporting by Virginia; Editing by Saikat Chatterjee and Jan Harvey

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