European government bonds hunker down before stress test results

Most European government bond yields were flat or lower on Friday as the market hunkered down ahead of bank stress test results due this weekend and the Federal Reserve's policy meeting next week. With little economic data due on Friday, investors also looked to numbers next week that will give further clues on European growth prospects and inflation, after a surprise improvement in a euro zone manufacturing survey on Thursday.
Benchmark German government bond yields edged lower, while Austrian and Italian equivalents were the only two euro zone markets a touch higher amid fears that they would likely be at the centre of any stress test failures. A group 25 banks have failed European stress tests, while up to 10 of those continue to have a capital shortfall, two people familiar with the matter said on Friday. Italian newspapers said Monte Paschi and Banca Carige could be among the banks facing a capital shortfall. "It's a stable environment in terms of market action," said Gianluca Ziglio, an analyst at Sunrise Brokers. "I have not seen any particular move considering we have a significant risk over the weekend which would make sense for investors to get rid of some positions."
German 10-year yields fell 1 basis point to 0.89 percent. With euro zone economic growth looking anaemic and inflation faltering, Bund yields are close to their record low of 0.716 percent hit last week. The German IFO business sentiment report on Monday and flash estimates of German and euro zone inflation on Thursday and Friday will give the next indication of where the bloc's economy is heading.
"This is more of a little break in a more secular trend towards lower yields given sluggish growth in the euro zone and the more subdued inflation outlook," said DZ Bank strategist Christian Lenk. The European Central Bank will release the results of its Asset Quality Review, which measures whether European banks can stand up to another financial crisis, on Sunday. Banks which fail might be forced to raise more capital.
At 1500 GMT, Italian and Austrian bond yields were 2 bps and 1 bps higher at 2.53 pct and 1.12 pct, while all other euro zone equivalents were flat or lower. Greek yields were the best performers, down 9 bps at 7.37 pct, while Portuguese and Irish equivalents were down 3 bps at 3.28 and 1.82 pct. Spain's were 1 bps lower at 2.18 pct.