Article Highlights

  • "Semi core" countries benefit as German yields persist at lows
  • ECB, trade war concerns keep euro zone yields at lows
  • Belgian, French 10-year yields close to lowest since early Jan
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German government bond yields dropped 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 in the bloc.

With German 10-year Bund yields hovering around the 0.30 percent in recent weeks — and dropping to a six-week low of 0.27 percent on Friday — investors have little choice but to go down the credit spectrum.

While Southern European yields have fallen this week, the recent Italian bond selloff means investors remain cautious so countries such as France, Belgium and, to an extent, Ireland have benefited most.

Belgium’s 10-year government bond yield was down 7 basis points on Friday, its lowest level since early January at 0.64 percent, while the spread over Germany was at its tightest in four weeks at 37 bps.

French 10-year borrowing costs were at their lowest levels this year at 0.61 percent.

“Spreads have a tendency to tighten when rates move lower, as some investors who need yieldcan 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.

That said, Southern European debt did find some demand on Friday, with Italian 10-year yields dropping 6 bps to 2.586 percent and the closely-watched Italy/Germany bond yield spread at its tightest in over a week at 232 bps.

“This is largely due to a lack of political events in Italy, and the focus being much more on trade wars,” said Cyril Regnat, a fixed income strategist at Natixis. “Also, investors are seeing the ECB minutes as dovish, this is the reason why markets are bullish on bonds.”

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 also 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.