Euro zone bond yields edge up but growth fears linger

·2 min read

By Dhara Ranasinghe

LONDON, July 6 (Reuters) - Government bond yields across the euro area nudged up on Wednesday, but the moves were modest as growing concern the world economy is heading for recession nagged investors.

Such worries, exacerbated by the latest surge in European gas prices, were expected to limit any selling in bond markets.

Most benchmark 10-year bond yields were 2-3 basis points (bps) higher in early trade, with debt supply from Germany later in the session putting some upward pressure on yields.

Germany's 10-year Bund yield was up 3 bps at 1.21% . But it is down 15 bps so far in July and if that trend holds, bond yields would have broken a months' long rising streak. Bund yields have risen for the last seven months.

"We continue to see downside for euro area rates," said ING's senior rates strategist Antoine Bouvet.

"It seems logical to us that the move should be greater at the shorter end of the curve. In a context where recession concerns are more marked than, say, in the U.S., and as supply weighs on the sector, it would seem logical that long bonds struggle to participate in the rally to the same extent."

Two-year German bond yields are down roughly 22 bps this month. They were last up around 1 bps at 0.44%.

Concern that aggressive central bank rate hikes will slow growth has triggered something of a turning point for the world's biggest bond markets, which were hit in the first half by soaring inflation and rising official rates.

Sharp falls in European yields have been echoed in the U.S. Treasury market, with a key part of the yield curve stuck in inversion territory for a second day in a sign that bond investors sense heightened recession risks.

Mike Kelly, head of multi-asset at PineBridge Investments, said demand to increase exposure to bonds with longer-dated maturities was growing again.

"Since (Federal Reserve chief Jerome) Powell two weeks ago made it clear they are not trying to create a recession but are willing to take that recession risk, duration has been on the move," he said.

"Bond markets are sniffing out that recession is coming." (Reporting by Dhara Ranasinghe; editing by Barbara Lewis)

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