Euro zone bond yields hold below recent highs on growth unease

BY Reuters | ECONOMIC | 05/16/22 03:08 AM EDT

LONDON, May 16 (Reuters) - Most government bond yields across the euro area were a touch lower on Monday, holding below recent multi-year highs in the face of growing concern about the global growth outlook.

China's retail and factory activity fell sharply in April as COVID-19 lockdowns confined workers and consumers to their homes and severely disrupted supply chains, denting the outlook for the world's second-largest economy.

That weighed on world stock markets, in turn lending support to safe-haven bonds. While both stocks and bonds have been hit hard this year by soaring inflation and expectations for tighter monetary policies, a darkening global economic outlook has encouraged investors back into fixed income.

In early trade, Germany's benchmark 10-year Bund yield was down 1.5 basis points at 0.94%, holding below roughly eight-year highs hit earlier this month at around 1.19%.

It was a similar pattern across the euro zone. Analysts said that with aggressive rate hikes now priced in, the momentum for a further push higher in yields had ebbed.

Italian 10-year bond yields were little changed at 2.84% , having shot above 3% this month.

"The coming days will show whether the volatility in global bond markets will ease after the pronounced swings of late," said Commerzbank rates strategist Rainer Guntermann.

The European Central Bank (ECB) will likely decide at its next meeting to end its stimulus programme in July, and raise rates "very soon" after that, ECB policymaker Pablo Hern?ndez de Cos said on Saturday.

Commerzbank's Guntermann said focus was likely to turn to the release of latest European Commission forecasts later in the day, adding that a sharp upward revision for inflation and downward revision to growth was on the cards.

Elsewhere, there was focus on Germany where the conservative CDU party looked set to win a regional election in North Rhine-Westphalia on Sunday, but the Green party could emerge as "kingmaker" in a potential coalition with Chancellor Olaf Scholz's Social Democrats and the FDP.

Analysts said the results from the big German state were not a good sign for Scholz.

"He (Scholz) is widely seen as not leading the debate on key issues such as Germany's response to Putin's war," said Berenberg chief economist Holger Schmieding, referring to Russian President Vladimir Putin. (Reporting by Dhara Ranasinghe, editing by Ed Osmond)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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