European Bonds Rise as Stock Markets Extend $5.6 Trillion Rout

Updated on
  • Region's bonds resume gains after $39 billion of debt issued
  • Brent crude oil falls below $30 a barrel to lowest since 2004

The Stoxx Europe Index Declines 2.5 Percent

European government bonds advanced as stock markets extended their decline and oil tumbled to the lowest level since 2004, boosting demand for the relative safety of fixed-income assets. 

The region’s bonds have resumed the upward trend they had at the start of 2016 after traders weathered the 36 billion euros ($39 billion) of new supply that investors bought at auctions and in syndications this week. The weakening inflation outlook for the euro area, coupled with market turmoil sparked by China, has added to the pressure for the European Central Bank to increase monetary stimulus to combat the threat of deflation and low growth. Global equity markets have lost about $5.6 trillion this year.

“There is still general fear and unease about the environment,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London. “You’re seeing that taken out on vulnerable areas in the markets. Equities have been vulnerable given the run-up we’ve had over the last few years. It feels like it’s still a very nervous market and that is what’s feeding into fixed-income.”

Benchmark German 10-year yields declined three basis points, or 0.03 percentage point, to 0.54 percent as of 4:49 p.m. London time. The 0.5 percent security due in February 2026 rose 0.315, or 3.15 euros per 1,000-euro face amount, to 99.595.

Italy’s 10-year bond yield fell one basis point to 1.57 percent, while the yield on similar-maturity Spanish bonds dropped three basis points to 1.75 percent.

Euro-area bonds extended gains with Treasuries after data showed U.S. retail sales declined in December to wrap the weakest year since 2009. Traders have been paring back their expectations for subsequent interest-rate increases from the Federal Reserve.

Some ECB policy makers argued in favor of making a deeper cut to the deposit rate and stepping up the monthly pace of bond-buying, an account of the Dec. 3 Governing Council meeting released Thursday showed. The next policy meeting is on Jan. 21. On the day before, a report will confirm the region’s inflation rate held near zero in December, according to economists surveyed by Bloomberg.

Finland’s two-year note yield dropped to a record low of minus 0.396 percent. Germany’s two-year yield touched minus 0.41 percent Friday, the lowest since Dec. 3.

“Clearly these moves have further to run,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “Oil has no support in sight, while European equities have now breached important technical support levels.”