August 15, 2019 / 7:47 AM / 2 months ago

German government bond yield curve flattens as recession concerns mount

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

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 wracking Hong Kong.

The State Department warned that continued erosion of the territory’s autonomy put at risk the preferential status it enjoys under U.S. law.

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

The inversion piles pressure on the U.S. Federal Reserve to cut interest rates.

“While we don’t expect an imminent recession, the case for further rate cuts in the U.S. is getting stronger, with Powell having little option, and thus keeping U.S. yields in check,” said Andrea Iannelli, Investment Director, Fidelity International.

“We expect the Fed to cut at least once more this year, and potentially twice, in line with market expectations.”

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 today.

Germany’s 30-year bond yield fell below -0.2% for the first time on Thursday to a low of -0.211%.

The German yield curve is also flattening with the spread between two-year and 10-year German debt tightening to as little as 21 basis points. It was last this flat in 2008., . (Reporting by Virginia Furness; Editing by Hugh Lawson)

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