Eurozone bond yields near record lows as US yield curve inversion deepens

London

THE EURO area's government bond yields edged back towards record lows on Wednesday as a key part of the US Treasury curve inverted further, fuelling concern that a recession is coming.

Italy's bond yields steadied after posting their biggest one-day fall in almost two months on Tuesday as the country inched towards the formation of a new government.

Even the brighter tone from the eurozone's third biggest economy failed to trigger selling in safe-haven German bonds against a backdrop of growing concern about global growth and expectations for aggressive monetary stimulus.

The US Treasury yield curve - as measured by the gap between two and 10-year bonds - is at its most inverted since 2007 on fears that US-China trade tensions will tip the economy into recession. The US bond yield curve is widely regarded as a key recession indicator.

In Japan, 30- and 40-year bond government yields hit three-year lows on Wednesday.

Eurozone bond yields edged lower in early trade with Germany's benchmark 10-year Bund yield at -0.70 per cent - within sight of recent record lows of -0.727 per cent.

"The rally in bonds in the US and Europe is continuing because expectations for a trade deal are moving further away," said Antoine Bouvet, senior rates strategist at ING in London. "The unpredictability of the trade conflict might push investors to price the worst outcome until they receive evidence that it can be avoided."

Germany, the eurozone's benchmark issuer, is due to sell three billion euros (S$4.6 billion) of 10-year bonds. It will follow a weak sale of 30-year German debt last week that was taken as a sign that appetite for holding bonds with deeply negative yields was waning.

Another test could come with a possible syndicated five-year bond deal from Finland that was expected to be launched on Wednesday.

Analysts say the new bond is likely to be priced with a negative yield.

Commerzbank said Italy's 10-year bond yield could soon test one per cent as political uncertainty clears. It fell to a three-year low of 1.124 per cent on Tuesday. REUTERS