Germany’s government bonds may extend gains next week as investors seek haven assets after China’s manufacturing activity plunged to a six-year low and an index of commodity prices touched the lowest level since 2002.
Yields on German 10-year bunds, Europe’s benchmark sovereign securities, fell to their lowest level in more than two months after Greek Prime Minister Alexis Tsipras stepped down to force an early election, clouding the political outlook. The yield premiums, or spreads, that investors get for holding the region’s higher-yielding debt instead of similar-maturity German bunds may increase, according to Danske Bank A/S.
“There has been a lot of risk-averse trading,” said Jens Peter Soerensen, chief analyst at Danske Bank in Copenhagen. “The Greek vote news and the decline in oil and emerging markets has seen spreads widen between peripherals versus core bonds. So where do you prefer to stay? You will stay in bunds.”
Germany’s 10-year bund yields dropped 10 basis points, or 0.1 percentage point, this week to 0.56 percent at the 5 p.m. close in London on Friday, the lowest since June 2. The 1 percent security due August 2025 climbed 0.945, or 9.45 euros per 1,000-euro ($1,136) face amount, to 104.22.
Soerensen said German bund yields “can easily go lower” and, if they breach 0.5 percent, could drop to 0.25 percent in the next one to two months.
The yield spread between Italian 10-year securities and German bunds widened to as much as 130 basis points Friday, the most since July 14. Italy’s 10-year bond yield increased five basis points this week to 1.86 percent.
Signs of a deepening slowdown in China’s economy and tumbling commodities stoked deflationary fears, boosting demand for the safest fixed-income securities. Minutes of the Federal Reserve’s July meeting released Aug. 19 also prompted investors to push back their outlook for interest-rate increases.
“The focus will be on inflation and oil prices and if they continue to trend lower,” Soerensen said.
Investors’ outlook for inflation touched a five-month low this week, with five-year inflation swap rates, a market gauge of consumer-price growth over that period, slipping to 0.73 percent on Aug. 21, the lowest since March 2.
German business confidence fell in August, according to the median forecast in a Bloomberg survey of economists before the report is released on Aug. 25.