Investors retreat to euro zone debt as stocks sink again

LONDON: Euro zone borrowing costs dropped across the board on Thursday, as an early boost to stock markets lost steam entirely as the session wore on, sending investors back towards the safety of government debt.

Severe stock market volatility has boosted demand for government bonds in recent months, sending the yield on German 10-year debt -- seen as one of the safest and most liquid assets in the world -- to a six-month low of 0.20 percent last week.

And more volatility this week has kept those yields pinned near those levels. On Thursday, Germany's 10-year borrowing costs dropped to 0.22 percent at one stage before settling at around 0.24 percent at 1130 GMT, down 1.5 basis points on the day.

Other high-grade euro zone bond yields -- such as those of Austria and the Netherlands -- were also 1-2 basis points lower on the day.

"I think we are seeing a re-allocation of fund flows from equities to bonds in the US and that's keeping European yields lower as well," said Mizuho strategist Antoine Bouvet.

Ten-year US Treasury yields dropped 2.5 bps to 2.77 percent on Thursday.

"I don't think the current yield (on German debt) sustainable in the longer term given how the supply picture is going to change," he added, referring in part to the end of the European Central Bank bond-buying scheme, effective at the end of this year.

Stock market volatility has been showcased in this week's moves alone. Global stocks hit a two-year trough on Christmas Eve, but a dramatic surge in US stocks on Wednesday -- the Dow Jones Industrial Average notched its biggest point surge ever -- and its subsequent effect on Asian and European shares had some hoping the market had bottomed out.

Yet, as Thursday rolled on, the market changed direction again and a pan-European stock index was lower 0.8 percent by 1130 GMT.

What's more, Wall Street futures pointed to a sharply lower open later in the session.

Meanwhile, Italian government bond yields cancelled out an early rise and were actually lower 3-6 bps by 1200 GMT.

"There's little in the news that justifies the move lower in Italian yields, I wouldn't expect this to last as net supply cranks up next year," said Bouvet of Mizuho.

Early on Thursday, concerns over Banca Carige -- which had a cash call blocked by its largest shareholder -- had pushed the Italy 10-year bond yield spread over Germany wider, but by midday it was tighter on the day at 258 bps.