August 15, 2019 / 10:39 AM / 10 days ago

UPDATE 1-German government bond yield curve flattens as recession concerns mount

* Trade war, recession fears see bund yields hit new lows

* Gap between two and 10-year German bund yields now 20 bps

* Central banks “only game in town” - strategist (Updates pricing, adds quote, chart)

By Virginia Furness

LONDON, Aug 15 (Reuters) - Euro zone government bond yields went further into negative territory on Thursday, reflecting concerns of an impending global recession after the U.S. yield curve remained inverted for the second straight trading session.

Risk aversion globally among investors also increased after U.S. President Donald Trump appeared on Wednesday to tie a U.S. trade deal with China to a humane resolution of the weeks of protests in Hong Kong.

China’s Finance Ministry countered by saying China would take the necessary counter measures to the United States’ additional tariffs on $300 bln of goods, adding that the tariffs violate the consensus reached by the two countries.

This pushed yields further down after a brief respite in early trade, adding to worries about global growth, and pushing the German government bond yield curve to its flattest since 2008.

Government bonds globally are signalling recession with the U.S. and UK curves both inverted.

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

While some analysts warn against reading too much into the indicator, what they do agree is that the inversion piles pressure on the U.S. Federal Reserve to cut interest rates.

“Yes the inversion in the past has coincided with a recession in the following 18-24 months, we’re not talking about tomorrow,” said Andrea Iannelli, Investment Director, Fidelity International.

“We have seen stocks trading very poorly as a result of the yield curve inversion, so that will be flashing some additional warning lights for the Fed that they have to do more. The only question is can the Fed out-dove the market? At the very least they will have to match market expectations in the short term.”

The trade war between the United States and China has hit the global economy hard. Data showed that German economic output contracted in the second quarter of 2019 by 0.1% with analysts noting that the third-quarter numbers point to a contraction as well.

Analysts will also be watching data from the United States in the form of the Empire State Index and Philadelphia Fed surveys, which Mizuho says are the most forward-looking indicators on the economy released on Thursday.

Germany’s 30-year bond yield fell below -0.2% for the first time on Thursday to a low of -0.232%, while 10-year German bonds were 2.5 basis points lower at -0.674%.

The German yield curve is also flattening with the spread between two-year and 10-year German debt tightening to as little as 20 basis points. It was last that flat in 2008., .

“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.

Reporting by Virginia Furness; Editing by Hugh Lawson and Alison Williams

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