European bond yields slip as second day of US-China trade talks continues
European bond yields fell as markets monitored ongoing US-China trade talks. Germany's 10-year yield decreased by 4 basis points to 2.53%, while two-year yields dropped to 1.85%. Concerns over debt sustainability and increased volatility in bond markets were noted, with Japanese investors selling German bonds significantly. ECB officials indicated a potential end to rate cuts, although some analysts believe inflation will continue to decline, suggesting further cuts may be necessary. Investors are also awaiting U.S. inflation data influenced by tariffs.
(Updates prices)
By Linda Pasquini
June 10 (Reuters) - Euro zone government bond yields fell on Tuesday but hovered not far from the previous day’s levels, as markets monitored a second day of trade talks between the United States and China.
Traders were also focusing on a host of European Central Bank officials speaking this week after the central bank cut interest rates last week by 25 basis points to 2%, as expected, but signalled it may be closer to the end of its easing cycle than many had predicted.
Germany’s 10-year yield (DE10YT=RR) , the benchmark for the euro zone, was down 4 basis points at 2.53%.
Two-year German yields (DE2YT=RR) also fell 3 bps to 1.85%, while 30-year yields were down 4.5 bps at 2.99%.
Longer-dated global bond yields have risen sharply this year, as investors everywhere have grown more concerned about debt levels in developed countries, in particular.
“We still have some news flow about debt sustainability,” said Nabil Milali, portfolio manager at Edmond de Rothschild Asset Management, pointing to higher volatility than before in the bond markets as institutional investors are less involved and more hedge funds and “fast money” players enter the picture.
Japanese investors had their largest monthly sell-off of German bonds in more than a decade in April, data showed on Monday, a month after Germany’s borrowing costs shot up in reaction to a debt-rule overhaul to ramp up spending.
“When you have a new risk emerging, you can expect now the volatility of bonds to be more important than before, just because these price-sensitive investors will more easily sell or buy, depending on the headline, government bonds,” Milali said.
The 10-year Italian yield (IT10YT=RR) dropped 4 bps to 3.45%, leaving the gap between German and Italian yields (DE10IT10=RR) at 90 bps.
ECB officials speaking this week include board member Isabel Schnabel, with comments from policymakers Peter Kazimir and Robert Holzmann on Monday supporting the view that an end to rate cuts may be approaching.
However, Finnish central bank chief Olli Rehn said the ECB should be mindful of risks, including that of price growth going too far below its target.
“We think (the ECB’s) hawkish bias is misplaced. We think that inflation in Europe is only going in one direction, which is downward. And we think that data will eventually convince the ECB to continue rate cuts,” Milali said.
Analysts at Frankfurt-based Metzler expected some downside potential at both the short and long ends of the yield curve for the time being, given the ECB’s own expectations for inflation to reach 1.6% next year.
Elsewhere, Japan’s super-long government bond prices rose on Tuesday, after Reuters reported the government was considering buying back some super-long-dated bonds in a move to contain rising yields.
Investors will also be looking for any impact from tariffs in inflation data out of the U.S. this week.
