German bond yields fall amid growth fears, equity weakness

German bond yields slipped towards record lows on Wednesday as concerns over global growth spurred demand for safe-haven debt.

The euro zone’s largest economy was at the centre of jitters about the region after poor industrial data this week and warnings from the IMF about a slower-than-expected recovery in domestic demand.

The German data has overshadowed worries that the United States will start to raise interest rates soon, which would push German bond yields higher, and has prompted investors to switch out of risky investments. On Wednesday, it sent European stocks to a one month low in early trading, in favour of top-rated bonds.

German 10-year yields - which have an inverse relationship to prices - dropped 2 bps to 0.89 per cent, just above record lows of 0.867 per cent hit in August.

The move followed a sharp fall in 10-year US Treasury yields on Tuesday, when long-dated yields hit their lowest levels since May 2013, despite the threat of a rise in interest rates.

Market watchers will be scouring minutes from the US Federal Reserve’s last meeting, due out later on Wednesday, although expectations of any clues on the possible timing of a rate rise were limited.

"We only look for some clarification regarding the Fed's exit strategy, instead of the timing which remains linked to data," said Commerzbank in its morning strategy note.

William Dudley, president of the New York Fed, said on Tuesday an interest rates rise could be reasonably expected in mid-2015, in a speech that cautiously predicted a rebound in economic growth and inflation.

Back in Europe, Germany is set to auction €4 billion of a new five-year bond, while Portugal will tap around €1 billion of a 2020-maturity bond.

Low yields could hurt demand at the German auction, especially given the country has recorded seven technical failures this year. Portugal's sale, however, is expected to be strong with some predicting the country could be in for a rating upgrade when Fitch releases its latest assessment on Friday.

Greek bonds were the worst-performing euro zone bonds on Wednesday as concerns around the EU and IMF’s latest review of Athens’ bailout programme, and a government confidence vote later this week, continued to weigh on markets. Ten-year yields were up 6 bps at 6.77 per cent.

Reuters