German recession fears keep euro zone yields low ahead of GDP data

London - German GDP data due at 0900 GMT, recession feared. Italy 15-year syndication could be launched Tuesday.

di By Abhinav Ramnarayan

London - Euro zone government bond yields hovered near recent six-month lows on Tuesday ahead of the release of German economic output data that could confirm the bloc’s largest economy dipped into recession in the last quarter of 2018. Italy could provide some cheer to euro zone bond markets with its first syndicated bond deal in a year, but the focus was the release of German gross domestic product data at 0900 GMT. A Reuters poll showed expectations are for overall growth of 1.5 percent in 2018. But investors are concerned that Europe’s largest economy contracted again in the final three months of the year after shrinking 0.2 percent in the third quarter. That would undermine the wider euro zone’s economic recovery just as the European Central Bank starts gradually ending crisis stimulus measures. “German GDP will attract more attention than usual this time around given all the talk about recession,” said Commerzbank rates strategist Christoph Rieger. “I also add (ECB President Mario) Draghi’s appearance (in the European Parliament) today as it is his last chance ahead of the blackout period to correct market expectations which have become quite dovish of late.”

Draghi will address the parliament in Strasbourg and take questions from lawmakers at around 1500 GMT. The ECB’s forward guidance is that it will hike rates later in 2019, but money market investors are only pricing in a roughly 43 percent chance this will actually happen. As a result, most high-grade euro zone bond yields were pinned near recent lows. France’s 10-year bond yield edged lower to 0.63 percent, a shade off a six-month low of 0.627 percent hit on Monday, while Dutch 10-year yields were close to their lowest level since April 2017 at 0.33 percent. Germany’s 10-year bond yield, the benchmark for the region, was a basis point lower at 0.22 percent. While this isn’t close to a recent landmark, this is mostly because of a change in the benchmark 10-year bond this week from an August 2028 maturity to a February 2028 one. That old August 2028 bond was trading at 0.17 percent on Tuesday, 3 bps off a two-year low of 0.141 percent hit at the start of the year.
Demand for Italian government bonds meanwhile remained strong ahead of its imminent return to international debt markets with its first syndicated bond sale since January 2018. After a year in which bond market participants fretted over Italy’s fractious and divided politics and plans to expand a debt pile that is already one of the largest in Europe, the country is set to launch a 15-year bond sale. On Friday, Italy’s debt agency announced they had hired banks for the new bond sale that analysts are expecting to be launched later on Tuesday.

“We are looking for a sizeable order book and a size of 7.5 billion euros,” said Rieger of Commerzbank. “That will be showing to the market that they are able to tap the market even in the long-dated bracket and should bolster sentiment which has taken quite a hit from the banking stories.” Meanwhile, British Prime Minister Theresa May urged lawmakers on Monday to take a “second look” at her deal to leave the European Union, a last-ditch effort to win over a parliament that looks set to reject the agreement later on Tuesday.