July 1, 2019 / 2:46 PM / 3 months ago

UPDATE 2-ECB comments knocks euro zone bond yields to fresh lows

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By Dhara Ranasinghe

LONDON, July 1 (Reuters) - Government bond yields across the euro area fell to record lows on Monday after comments from European Central Bank officials, including a known “hawk”, boosted expectations for monetary easing soon to lift inflation and growth.

The French 10-year bond yield pushed decisively into negative territory, having flirted with the sub-zero barrier in recent weeks, while Italian long-dated bond yields dropped below 2% for the first time since May 2018.

Euro zone inflation remains unacceptably low and the ECB will ease policy further if necessary to boost price pressures, policymakers said, just weeks after ECB chief Mario Draghi hinted at more stimulus.

Analysts paid particular attention to comments from Dutch central bank chief Klaas Knot who said that while the euro zone was not in recessionary territory, expectations for the second and third quarter were less favourable than the first quarter. He said the ECB was determined to act in adverse scenarios.

“Coming from Knot, who’s at the hawkish end of the spectrum, the comments show how much the ECB Governing Council has shifted position and that a rate cut is likely in September,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Bond yields tumbled across the single currency bloc as prices shot higher.

France’s 10-year bond yield pushed decisively below 0% to a record low at minus 0.054%.

Germany’s Bund yield hit a fresh record low of -0.36% , less than five basis points away from the ECB’s deposit rate.

The German bond yield curve was at its flattest since 2015, with the gap between short and long-dated bond yields at around 38 bps.

Dutch, Belgian, Austrian and Portuguese 10-year bond yields also fell to fresh record lows .

“Since he (Knot) is a hawk, the comments suggest the governing council is coming around to the need for more stimulus, so the market is reacting to that,” said DZ Bank rates analyst Rene Albrecht. “We think they (the ECB) could do something in July.”

A 10 basis point cut in the ECB’s -0.40% deposit rate is now fully priced in for the ECB’s September meeting, while markets see an almost 50% chance of a cut in July.

In Italy, bond yields extended falls made earlier as global risk appetite picked up after the United States and China agreed on Saturday to restart trade talks.

Italy’s 10-year bond yield fell 16 bps on the day at 1.921% , its lowest in over a year. That pushed the gap over German Bund yields to its tightest since last September, at around 228 bps.

Greece’s 10-year yield hit a record low of 2.3% with analysts saying Greece and Italy - the euro zone’s lower-rated states - were benefiting from the rush into bond markets given ultra-low yields on higher-rated bonds. (Reporting by Dhara Ranasinghe; Editing by Frances Kerry and Hugh Lawson)

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