Eurozone bonds continue to fall on weak China data, looming Brexit deal
London — Eurozone bond yields extended falls on Monday after weak Chinese data added to a gathering storm of risk aversion while investors await further clarity from Tuesday’s Brexit vote in Britain’s parliament.
Concerns about the German economy and the government shutdown in the US, as well as the threat of a new election in Greece, added to the bid for safe-haven assets across the bloc and 10-year bond yields fell as much as five basis points.
Asian and European shares led the fall on Monday after China’s exports unexpectedly fell the most in two years in December.
After a muted start, the bid for safe-haven eurozone bonds gathered momentum, tracking a move by US Treasuries in which 10-year yields fell 3.4 basis points to 2.66%.
Germany’s 10-year government bond yield, the eurozone benchmark, fell three basis points, 0.207% lower on Friday’s close but bolstered by new supply last week.
Matt Cairns, a rates strategist at Rabobank, said that signs of weakness in Europe’s hitherto strongest economy are also driving down Bund yields.
Data on Monday showed eurozone industrial output fell in November by more than expected.
“What is also feeding in is some discussion that there may be additional tax cuts required to prop up the German economy,” said Cairns. “The possibility that the European Central Bank [ECB] can engineer higher rates … is really failing.”
Legislators from Chancellor Angela Merkel’s Christian Democrats (CDU), meeting at the weekend, discussed introducing new tax cuts when the governing coalition reviews its work towards the end of 2019, the party’s leader said.
Annegret Kramp-Karrenbauer, who succeeded Merkel as party leader late in 2018, told Welt television that tax cuts should be used as stimulus to pre-empt a possible downturn. Earlier, finance minister Olaf Scholz had said there is space for tax cuts if the economic outlook darkens.
German data has disappointed lately, pointing to a slowdown in economic growth that ECB policymaker Ewald Nowotny said on Saturday could be a lasting phenomenon caused by structural problems, particularly in its car industry, rather than a one-off.
Investors are also poised ahead of Tuesday’s Brexit vote.
The future path of Britain’s exit from the EU is uncertain as parliament is likely to vote down Prime Minister Theresa May’s deal on Tuesday. Possible outcomes include a last-minute deal, a disorderly exit, a new referendum or remaining in the bloc.
Meanwhile, the threat of new elections in Greece kept upward pressure on its bond yields with its 10-year government bond yield two basis points higher at 4.30%.
Greek Prime Minister Alexis Tsipras said on Sunday he will call a confidence vote in his government after his coalition ally quit, depriving him of a parliamentary majority and raising the possibility of a snap election.
Greece is expected to bring a new syndication to market soon but further political uncertainty and any rise in yields may skewer its chances of a new deal in the short term.