By Dhara Ranasinghe
LONDON (Reuters) – The euro area’s government bond yields edged back towards record lows on Wednesday as a key part of the U.S. Treasury curve inverted further, fuelling concern that a recession is coming.
Italy’s bond yields steadied after posting their biggest one-day fall in almost two months on Tuesday as the country inched towards the formation of a new government.
Even the brighter tone from the euro zone’s third biggest economy failed to trigger selling in safe-haven German bonds against a backdrop of growing concern about global growth and expectations for aggressive monetary stimulus.
The U.S. Treasury yield curve – as measured by the gap between two and 10-year bonds – is at its most inverted since 2007 on fears that U.S./China trade tensions will tip the economy into recession. The U.S. bond yield curve is widely regarded as a key recession indicator.
In Japan, 30- and 40-year bond government yields hit three-year lows on Wednesday.
Euro zone bond yields edged lower in early trade with Germany’s benchmark 10-year Bund yield at -0.70% <DE10YT=RR> – within sight of recent record lows of -0.727%.
“The rally in bonds in the U.S. and Europe is continuing because expectations for a trade deal are moving further away,” said Antoine Bouvet, senior rates strategist at ING in London.
“The unpredictability of the trade conflict might push investors to price the worst outcome until they receive evidence that it can be avoided.”
(GRAPHIC: U.S. Yield Curve – http://tmsnrt.rs/2zUqXiW)
Germany, the euro zone’s benchmark issuer, is due to sell 3 billion euros of 10-year bonds later. It will follow a weak sale of 30-year German debt last week that was taken as a sign that appetite for holding bonds with deeply negative yields was waning.
Another test could come with a possible syndicated five-year bond deal from Finland, expected to be launched on Wednesday. Analysts say the new bond is likely to be priced with a negative yield.
Italy’s bond yields were little changed with the focus on talks between the ruling anti-establishment 5-Star Movement and opposition Democratic Party to form a new government.
Discussions between the two parties resumed on Wednesday after running into trouble on Tuesday night.
Commerzbank said Italy’s 10-year bond yield could soon test 1% as political uncertainty clears. It fell to a three-year low of 1.124% on Tuesday.
Elsewhere, a rally in Greek bonds continued following news on Monday that Greece will lift the last of its capital controls.
Greece’s 10-year bond yield touched a fresh record low of 1.811% <GR10YT=RR>.
(Reporting by Dhara Ranasinghe; Editing by Andrew Heavens)