LONDON (Reuters) - German government bond yields fell to six-week lows while Belgian and French borrowing costs hit their lowest levels since at least early January as investors sought safe assets in the face of economic and global trade concerns.
Although the prospect of a trade war between the United States and China eased a touch on Friday, worries over slowing economic growth in Europe and cautious comments from European policymakers on future rate increases have held down yields across the bloc.
German 10-year Bund yields DE10YT=RR fell to a six-week low of 0.26 percent on Friday. With bond yields in Germany, the euro zone’s benchmark bond issuer, so low investors are now moving down the credit spectrum.
Bonds from France and Belgium and, to an extent, Ireland have benefited the most.
Belgium’s 10-year government bond yield fell 7 basis points on Friday to 0.62 percent BE10YT=RR, its lowest level since January, while the spread over Germany was at its tightest in four weeks at 37 bps. DE10YT=RR
French 10-year borrowing costs were at their lowest levels this year at 0.61 percent. FR10YT=RR
“Spreads have a tendency to tighten when rates move lower, as some investors who need yield can buy assets such as French debt to get a pick up compared to Germany,” said Mizuho strategist Antoine Bouvet.
“The semi-core has the benefit that it doesn’t have the political risk of Italy,” he added. “Semi-core” is used to describe countries such as France and Belgium that are just below “core” euro zone members Germany and the Netherlands in the credit ratings spectrum.
The positive momentum in core markets spread to southern European bonds, with Italian 10-year bond yields falling to three-week lows at 2.55 percent IT10YT=RR.
“Yields keep going down, and there is a feeling that inflation is not going anywhere and therefore upside risks to rates must be diminishing,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
The European Central Bank will keep rates at a record low for as long as needed to raise inflation, and its interest rate guidance should be seen as “open-ended”, policymakers concluded in June, according to minutes of their meeting published on Thursday.
Southern European countries are seen as the biggest beneficiaries of loose monetary policy - so Spanish and Portuguese yields were also 2-3 bps lower on the day.
But they are well above the year’s lows, hit in March and April, before the arrival in government of a coalition of anti-establishment parties in Italy hurt the debt of all three countries.
It may have helped that risk sentiment improved overall and stock markets strengthened, with U.S. Treasury Secretary Steven Mnuchin saying the United States and China could reopen talks on trade.
Reporting by Abhinav Ramnarayan; Additional reporting by Dhara Ranasinghe; Editing by Robin Pomeroy