UPDATE 2-Euro zone bond yields fall as stock markets skid

·2 min read

(Updates price action)

By Yoruk Bahceli

Sept 20 (Reuters) - Euro zone bond yields fell on Monday as weaker commodity prices, default worries about China's Evergrande and caution before this week's U.S. Federal Reserve meeting pressured stocks and boosted safe-haven government debt worldwide.

Germany's 10-year Bund yield, the benchmark for the euro zone, fell around 4 basis points to -0.32%, notching up one of its biggest falls in recent months.

Bond yields move inversely with prices. And the move down in Bund yields pushed them well below a 10-week high hit on Friday at -0.265% after a report suggested the European Central Bank expects to hit its inflation target by 2025.

Other 10-year euro area bond yields were 1-4 bps lower.

"It's better to be invested in sovereigns than equities and other riskier assets, that's what we're seeing today," said Daniel Lenz, rates strategist at DZ Bank.

Referring to Chinese property developer Evergrande, he added: "Nobody knows really whether this is a crisis in China which is being solved quickly or the beginning of something bigger."

Investors are also concerned about what the stress at Evergrande will mean for China’s economy and its growth prospects, Lenz said.

After Friday's ECB-driven sell-off, the risk-off tone in stocks and concern that soaring gas prices could hurt economic growth took over.

ECB board member Isabel Schnabel said on Monday that she welcomed the recent spike in inflation, adding that the volume of ECB bond buying is becoming less important as the economic outlook improves.

There was little reaction in Portuguese and Greek bonds to rating upgrades from Moody's and DBRS respectively.

DBRS upgraded Greece to BB, two notches below investment-grade, with a positive outlook.

"The upgrade for Greece together with a positive outlook from DBRS should further fuel expectations for a return to investment-grade next year," said Rainer Guntermann, rates strategist at Commerzbank.

The ECB made an exception to include junk-rated Greek bonds in its pandemic emergency bond purchases last year. But once those expire next year eligibility for the ECB's conventional bond purchases requires at least one investment-grade rating.

That may take at least until autumn next year as Greece would need to secure a two-notch upgrade from one of three rating agencies to comply, Guntermann said.

Political uncertainty in Germany ahead of Sunday's election, where the Social Democrats are leading opinion polls that point to a highly fragmented outcome, was also in focus for euro zone debt investors.

After a hefty pace of issuance last week, debt supply will slow this week. Around 10.5 billion euros of euro area government bond issuance is expected, the lowest level in six weeks, according to Commerzbank. (Additional reporting by Dhara Ranasinghe; editing by Timothy Heritage and Gareth Jones)

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