November 14, 2019 / 11:37 AM / 23 days ago

UPDATE 2-Euro zone bond yields fall to one-week lows as growth, trade fear resurface

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds move in BTP yields)

By Yoruk Bahceli and Dhara Ranasinghe

LONDON, Nov 14 (Reuters) - Euro zone government bond yields fell to one-week lows on Thursday as weak economic data globally gave investors an incentive to move back into fixed income after a recent selloff.

China’s factory output growth slowed more than expected in October, Japan’s economy ground to a standstill in the third quarter and the German economy only narrowly sidestepped a recession in the third quarter.

Renewed uncertainty about U.S.-China trade talks also boosted safe-haven assets.

“The data is still downbeat,” said Chris Scicluna, head of economic research at Daiwa Capital Markets. “All the factors that contributed to the bond selloff - whether that’s optimism on a trade deal or signs that data is stabilising - we’d say there isn’t a great deal of substance to them.”

Across the euro area, long-dated bond yields fell 3-4 basis points each. German, French and Dutch 10-year bond yields reached one-week lows .

France’s 10-year bond yield slipped back into negative territory a week after it turned positive for the first time since July. Germany’s Bund yield fell to a low of -0.34% , down from last week’s three-and-a-half-month low around -0.22%.

The euro zone economy continued to grow at a modest pace in the third quarter, as expected, data showed on Thursday.

“Obviously, it’s better than expected; Germany didn’t enter into a technical recession, [but the] market seems to have shrugged it off,” said Lyn-Graham Taylor, a fixed-income strategist at Rabobank, referring to the German data.

German Economy Minister Peter Altmaier warned that economic developments remained fragile.

Concern that a U.S.-China trade deal may be less certain than hoped for a week ago fuelled the rally in safe-haven debt.

The Wall Street Journal reported that the talks had “hit a snag” over farm purchases, while U.S. President Donald Trump this week threatened to raise tariffs on China if it failed to sign a trade deal.

The selloff in risk assets hurt peripheral bond markets, which have come under heavy selling pressure in the past week.

Italy’s two-year bond yield rose 7 bps to 0.13%, its highest in almost three months, while the Italian/German 10-year bond yield gap was its widest since early September at around 172 bps.

Elsewhere, the volumes behind the euro zone’s new unsecured overnight lending benchmark, ESTR, fell on Wednesday to 23 billion euros compared with 30 billion euros a day earlier, according to data from the European Central Bank.

The number of active banks behind ESTR fell from 30 to 20, with the share of the five most active banks increasing to 70% from 57%. This suggested that smaller banks may have dropped out from the market - a move analysts said may be attributed to the ECB’s new tiered rate policy, which has encouraged banks to park cash at the central bank. (Reporting by Dhara Ranasinghe and Yoruk Bahceli Editing by Mark Heinrich)

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