August 14, 2014 / 7:45 AM / 4 years ago

German 10-year yields hit record lows on euro growth scare

* French 10-year yields within sight of record lows
    * German Q2 GDP surprisingly contracts; France stagnates

 (Adds analyst comments, detail)
    By Emelia Sithole-Matarise
    LONDON, Aug 14 (Reuters) - German 10-year bond yields fell
to a record low on Thursday as disappointing economic data from
the euro zone's two largest economies bolstered bets the
European Central Bank will have to ease policy again.
    The German economy shrank by 0.2 percent between April and
June, its first contraction in more than a year as foreign trade
and investment weighed on growth. It had been forecast to
stagnate, according to a Reuters poll.. 
    The French economy flatlined, undershooting forecasts for
growth of 0.1 percent. 
    The data fuelled concern an already patchy economic recovery
in the euro zone was hitting the skids, with many in the market
saying a lack of improvement in the second half of the year
would increase pressure on the ECB to print money via a
quantitative easing (QE) programme to stimulate growth.
    German 10-year yields, the benchmark for euro
zone borrowing costs, fell 2 basis points to 1.012 percent, an
all-time low. French 10-year yields were down by a similar
amount at 1.41 percent, within sight of a record
low of 1.399 percent hit two weeks ago.
    "Disappointing euro area growth and intensifying
disinflation pressures increase the pressure on the ECB for
further action in coming months," said Nick Stamenkovic, a
strategist at RIA Capital Markets in Edinburgh.
    "However, an early move is unlikely as the ECB assesses the
impact of the September four-year LTROs (long-term cheap loans
to banks). But if the economy disappoints in the second half 
then the pressure on the ECB to start QE in early 2015 will
    Stamenkovic and other strategists say it is a matter of time
before German 10-year yields attempt to breach the 1 percent
level, taking them further into uncharted territory. 
    Pressure on the ECB to act is already mounting. French
Finance Minister Michel Sapin urged the central bank in an op-ed
in French daily Le Monde to do more to combat deflationary risks
and make the euro more competitive. 
    Yields on Italian and Spanish bonds, which have benefited
most from the ECB's loose monetary policy, were slightly lower
at 2.72 percent and 2.47 percent respectively,
also not far from record lows.
    "Hopes of ECB action and the quest for return will support
peripheral debt markets too," Societe Generale strategists said
in a note.

 (Editing by John Stonestreet)
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