Benchmark 10-year government bond yields in the euro area inched down on Tuesday, as debt markets steadied after a sharp selloff the previous session on hopes of an easing of trade tensions between the United States and China. After rising to near two-week highs on Monday, most 10-year bond yields edged back down in what analysts said was largely position squaring.
But they said the outlook for bond markets remained somewhat bearish because of an easing in U.S.-China trade tensions, a growing sense that the worst is over for the euro zone economy and a rush of new bond supply at the start of the new year. The United States and China, the world’s two biggest economies, are just a day away from signing a Phase 1 trade agreement. In a sign of easing tensions, the U.S. Treasury said on Monday that China should no longer be designated a currency manipulator.
“There does appear to be some demand for European rates today, but over the course of the next six weeks we still reckon bearish forces will win out,” said Peter Chatwell, head of rates strategy at Mizuho. “Data is marginally improving and that should set the buying tone in credit spread products versus rates.” Economic growth and inflation in the euro zone are showing “good signs of stabilisation” after a slowdown, European Central Bank board member Yves Mersch said on Tuesday. The ECB holds its first meeting of the year next week.
Germany’s benchmark 10-year bond yield was down almost 2 basis points at -0.21%, having briefly touched its highest level in almost two weeks at -0.188%. Most other 10-year bond yields in the bloc were down around 1-2 bps on the day . “You had some good news in terms of China coming off the list of currency manipulators and so you would have expected bond prices to extend losses,” said Andy Cossor, a rates strategist at DZ Bank in Frankfurt.
“So, I think it might be a case that people got ahead of themselves yesterday and are covering short positions.” Hefty supply was also expected to limit any bond markets price gains. Bond yields and prices move in the opposite direction. Spain was set to sell a new 10 billion euro, 10-year bond on Tuesday, attracting one of the largest ever order books for such a sale from a sovereign issuer.
The strong demand for the new Spanish bond comes in a week that has seen a hefty level of new bond supply from across the euro zone, including Cyprus launching a syndication, while Spain’s southern European peer Italy held its first auction of the year. Another source of potential headwind for the bond market were market gauges indicating a mild pick-up in price pressures.
An important market gauge of long-term euro zone inflation expectations rose to its highest level since July at 1.36%.