Euro zone bond yields fall on concerns about global economy

LONDON: Euro zone government bond yields dropped from their recent elevated levels on Friday as concerns about the global economy nudged investors into safe-haven debt. A debt crisis in China's property sector, adding to a slew of weaker-than-expected data in the world's second-largest economy, is near the top of many investors' minds amid fear further problems could spill over into global markets

Euro area rates were also ready for a correction after the bloc's benchmark Bund yield approached its highest levels in 12 years on Thursday. Germany's 10-year government bond yield dropped 8 basis points (bps) on Friday to 2.62%. It is on track to end the week flat, after three consecutive weekly rises.

It hit 2.714% on Thursday, just off its highest level in 12 years, reached in early March at 2.77%. Bond prices move inversely with yields.

"The overnight bid across the U.S. Treasury curve amid in-line Japanese inflation figures and risk-off in China is encouraging and looks set to keep yields off the highs for now," said Michael Leister, head of rates strategy at Commerzbank. U.S. borrowing costs have also pulled back after benchmark U.S. Treasury 10-year yields hit their highest levels since October, and 30-year yields hit 12-year highs on Thursday.

Robust economic data had raised investor expectations that the Federal Reserve will hold interest rates higher for longer, as it tries to squeeze inflation out of the U.S. economy. Japan's core consumer prices slowed in July, supporting expectations the Bank of Japan (BOJ) will be in no rush to phase out monetary easing.

Data also showed further signs of weakness for the euro area economy, with building permits for apartments in Germany falling 27% during the first half of the year. Meanwhile, in Britain retailers reported a bigger-than-expected drop in sales in July as shoppers felt the hit from inflation.

Germany's 2-year yields dropped 5.5 bps to 3.04%, and the German yield curve further narrowed its inversion, with the gap between 2-year and 10-year yields hitting -35.4 bps, its least inverted level since mid-May. Central banks suggesting they will hold interest rates at high levels for an extended period had driven yields on longer-dated bonds higher, steepening yield curves on both sides of the Atlantic, analysts said.

Italy's 10-year yield, the benchmark for the euro area periphery, fell 9 bps to 4.32%, with the spread between Italian and German yields at 169 bps. China's economic problems were also shaping European and U.S. bond markets in other ways.

"Part of the reason behind the relentless rise in U.S. Treasury yields might be down to Chinese selling to raise funds to prop up the ailing yuan," said Jeremy Batstone-Carr, European strategist at Raymond James. China's yuan hit a more than nine-month low earlier in the week, and Reuters reported, citing sources, that China's major state-owned banks were seen busy selling U.S. dollars to buy yuan in an attempt to arrest the Chinese currency's rapid losses.

In addition, "Growth in China has disappointed, but not sufficiently to change the global picture. And weakness in China may even help reduce inflation in developed markets," said Mark Haefele, chief investment officer at UBS global wealth management.