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UPDATE 2-Euro zone bond yields plunge as U.S. GDP adds to recession fears

UPDATE 2-Euro zone bond yields plunge as U.S. GDP adds to recession fears

Reuters · 07/28/2022 07:09
UPDATE 2-Euro zone bond yields plunge as U.S. GDP adds to recession fears

Recasts after German inflation, U.S. GDP

By Samuel Indyk

- Euro zone bond yields fell on Thursday as global recession fears escalated following a second quarter of U.S. growth, looking past German inflation figures that showed an unexpected increase in harmonised consumer prices.

U.S. gross domestic product fell at a 0.9% annualized rate in the second quarter, an advance estimate showed. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.

Earlier, official data from Germany showed consumer prices, harmonised to make them comparable with inflation data from other European Union countries (HICP), increased by 8.5% on the year, following an 8.2% rise in June.

A Reuters poll of analysts had pointed to an overall annual HICP reading of 8.1% in July.

"A lot of that German data surprise versus economists' consensus should already have been factored in by the market," said Peter McCallum, rates strategist at Mizuho, citing earlier German state data.

"With that out of the way, European rates have been more trading on a dovish Fed last and more importantly, the very poor U.S. growth data."

Germany's two-year yield DE2YT=RR, which is sensitive to rate changes, dropped over 15 basis points (bps) to its lowest since May 17.

The 10-year yield DE10YT=RR, the benchmark for the bloc, dropped 10 bps to its lowest level since April 28.

The Federal Reserve on Wednesday acknowledged that the economy was slowing as it lifted rates by 75 basis points for the second consecutive meeting.

Still, U.S. yields slipped as the move was in line with market expectations and fell further after Thursday's GDP data.

Meanwhile, Italian bond yields were tracking their European counterparts with the closely watched spread between 10-year Italian and German borrowing costs DE10IT10=RR relatively steady at 244 bps.

Earlier in the day, the spread had briefly touched 257 bps, its widest since April 2020 and above the level that prompted the European Central Bank to hold an ad-hoc meeting to discuss strains in euro zone bond markets in June.

"Investors remain cautious given that we are close to the parliamentary elections in September," said Daniel Lenz, rates strategist at DZ Bank.

"Markets are more in favour of predictable governments and those which play by EU rules."

Italian bonds have been under pressure following the collapse of Mario Draghi's government last week. Rating agency S&P Global on Tuesday changed the outlook on the Italian sovereign to stable from positive in a surprise move.

(Reporting by Samuel Indyk; Editing Toby Chopra and Bernadette Baum)