German bond yields set for first weekly fall since May as growth fears grip

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Safe-haven German bond yields were set for their first weekly drop since mid-May on Friday in another demonstration of the extent to which growth fears have gripped markets this week.

Prior to this week, yields had risen sharply in the face of red-hot inflation and aggressive central bank rate hikes.

But US Federal Reserve Chairman Jerome Powell saying the bank was committed to curbing inflation even at risk of a growth downturn, a sharp slowdown in business activity growth and Germany triggering the alarm stage of its emergency gas plans have put growth fears and the risk of a potential recession in the spotlight this week.

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Germany’s 10-year yield, the benchmark safe asset for the euro area, has fallen 29 basis points (bps) this week, the first weekly fall since mid-May and the largest since the first week of March.

On Friday, it dropped as much as 8 bps to 1.354%, the lowest in over two weeks. It was down 7 bps to 1.37% by 0731 GMT.

Two- and five-year yields, particularly sensitive to policy expectations, have fallen even more this week, by 34 and 37 bps respectively.

“The general recession fear theme has been the key driver in rates markets since the FOMC last week and theme has intensified this week,” said Piet Christiansen, chief analyst at Danske Bank.

“The combination of earlier than expected signs of slowdown in the services sector, coupled with concerns of energy supplies raise the risk of the ECB having to deal with a stagflationary situation where inflation expectations keep on being high and the growth outlook being weak,” he added.

Given the scale of the bond market rally, euro investment-grade corporate bonds also delivered their biggest daily return since March on Thursday, according to ICE BofA’s index. Bond yields move inversely with prices.

On Friday, investors will eye Germany’s Ifo business climate index and a number of central bank speakers from the European Central Bank, US Fed and Bank of England. (Reporting by Yoruk Bahceli; Editing by Kim Coghill)