German yields drop as weak PMIs fuel growth worries;…

Italy bond selloff resumes, German yields tumble as weak PMIs fan growth worries

By Dhara Ranasinghe

LONDON, May 23 (Reuters) – German 10-year bond yields hit five-week lows on Wednesday, after news of a slowdown in euro zone business activity cast doubt on the timing of the ECB‘s planned exit from its hefty stimulus programme.

While most top-rated euro zone bond yields fell, Italy‘s bond market succumbed to selling again with the weak data encouraging investors to dump the euro zone‘s riskiest assets.

Italy‘s 10-year bond yield, pushed up by growing political risks, hit a 14-month high – widening the gap over German Bund yields by 18 basis points .

IHS Markit‘s Euro Zone Composite Flash Purchasing Managers‘ Index (PMI), considered a good guide to economic health, sank in May to an 18-month low of 54.1 from 55.1, below all forecasts in a Reuters poll, which predicted a dip to 55.0.

That followed weaker-than-expected PMIs in Germany and France, the two biggest euro zone economies, which alongside soft inflation suggested a stiffer policy challenge for a European Central Bank hoping to exit monetary stimulus .

“We had expected some stabilisation (in the PMIs). Clearly, we have not seen that, and the deceleration has increased downside risks to Q2 growth, which is a worry,” said Peter Kinsella, senior currency and rates strategist at CBA.

“We had anticipated that the ECB would give us some forward guidance in June. They may put a hold on that or give just a modest form of guidance.”

Ten-year bond yields in the single currency bloc, with the exception of southern Europe, fell 3 to 6 basis points.

Doubt over whether a North Korea summit next month would take place also gave investors another incentive to buy German bonds, considered one of the world‘s safest assets. Bund yields fell to five-week low of 0.496 percent.

But Southern European bonds were hit by new signs of momentum slowing. Portuguese, Italian and Spanish bond yields all rose .

Italy, also whacked in the past week by concern a spendthrift coalition government was taking shape in Rome, looked the most vulnerable. Its 10-year bond yield shot up more than 10 bps to 2.46 percent, while 2-year Italian yields hit their highest since July 2015 at 0.306 percent.

The cost of insuring exposure to Italian and Spanish debt rose to multi-month highs on concerns over Italy‘s political risks and broader pressure on markets.

“The PMIs were certainly surprising to us this morning,” said Investec economist Ryan Djajasaputra.

“It now also raises questions over the timing of the next move on the ECB, whether there actually will be a rate hike in the summer of 2019.”

Money market pricing on Wednesday suggested investors were scaling back bets the ECB would raise rates by mid-2019.

Investors now price less than a 60 percent chance of a 10-basis-point increase in the ECB‘s deposit rate in June next year versus 90 percent last week.

In Italy, focus remained on who will lead the coalition government proposed by the anti-establishment 5-Star and far-right League. On Tuesday, League leader Matteo Salvini said he would like to see eurosceptic economist Paolo Savona as economy minister, unnerving investors.

(Reporting by Dhara Ranasinghe; Additional reporting by Abhinav Ramnarayan Editing by Larry King and Raissa Kasolowsky)

Advertisement

Sorry we are not currently accepting comments on this article.