August 1, 2019 / 11:53 AM / 24 days ago

UPDATE 2-Euro zone bond yields touch new record lows on slowdown worries

* German 10-year bond hits -0.466%, another new low

* Survey shows euro zone manufacturing activity falling

* Rush into bonds follows Fed’s mixed message on rates

* Euro zone periphery government bond yields tmsnrt.rs/2ii2Bqr (Recasts after euro zone yields fall)

By Virginia Furness and Tommy Wilkes

LONDON, Aug 1 (Reuters) - Core euro zone bond yields slid to a new record low on Thursday as another batch of weak economic data caused a rush into U.S. Treasury debt and underlined investor nerves about a slowing economy.

Investors’ move back into euro zone bonds followed an earlier selloff of government debt after the U.S. Federal Reserve Chairman, Jerome Powell, tempered bets on more interest rate cuts when it made its first cut in more than a decade.

The 10-year German bund yield touched a new record low of -0.466%, down 3 basis points on the day.

The 30-year German bond yield was lower by more than 5 basis points to 0.069%, also a fresh record low.

French and Dutch bond yields followed to their own new lows, yielding -0.206% and -0.349% respectively.

Data showed the U.S. trade deficit jumped in May and trade tensions between Washington and China helped drive activity in the services sector to a two-year low in June, renewing worries about economic growth.

The 10-year Treasury bond yield dropped 6 basis points to 1.952%.

There was also weak data in the euro zone. Manufacturing activity in the region fell at its steepest rate since late 2012 last month as demand sank, a survey compiled by IHS Markit showed, puncturing sentiment among factory managers.

Forward-looking indicators in Thursday’s survey suggest manufacturing will not rebound anytime soon and is likely to embolden policymakers at the European Central Bank, who last week all but promised to ease policy further as the bloc’s growth outlook deteriorates.

In the United States, shorter-dated yields rose as traders scaled back positions on future rate cuts, while longer-dated yields fell on the Fed’s muted inflation outlook and the halting of its balance sheet normalisation two months early.

The Fed president was not as dovish as some had expected.

“Let me be clear – it’s not the beginning of a long series of rate cuts,” Powell said in a news conference after the Fed released its latest policy statement. At the same time, he said: “I didn’t say it’s just one rate cut.”

Mizuho rates strategist Peter McCallum noted that despite Powell’s reference to “mid-cycle adjustment”, the United States’ vast corporate debt and close-to-contraction manufacturing sectors suggest a much weaker outlook.

“This insurance cut looks very unlikely to be enough to raise inflation or materially prolong the cycle,” he said.

“The market should look through this 25 basis point cut, they have wasted ammunition and we think Treasuries will continue to be supported at the long end.”

This would be likely to keep downward pressure on euro zone bond yields, which are already highly negative.

ING analysts said: “The direction of travel for Euro rates is not in doubt: soft inflation and growth numbers allow ample justification for ECB easing.”

Data from Tradeweb on Thursday showed that more than 40% of European investment grade corporate debt is now negative yielding, while the pool of euro zone government bonds with negative yields also surged in July to 4.8 trillion euros or around 60% of the total. (Reporting by Virginia Furness and Tommy Wilkes Editing by Janet Lawrence/Mark Heinrich)

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