Short-dated German government bond yields held near one-month lows on Friday, suggesting demand for safe-haven debt remained strong after a turbulent week for world markets. Oil prices recovered from 12-year lows and Chinese stocks rebounded, restoring some stability, after China suspended its stock-market circuit breakers and nudged the yuan higher for the first time in nine days.
Data showing a surge in US jobs growth in December - which should give the Federal Reserve confidence to continue raising interest rates - did not shake demand for Bunds or Treasuries, regarded as some of the safest assets in the world. Yields on two-year German bonds held near Thursday's one-month low of -0.40 percent, indicating that investors are not ready to pile out of debt markets just yet.
A BofA Merrill Lynch Global Research report said a clear bid for safe assets was reflected in fund flows, with government bond and Treasury funds seeing their largest inflows in 13 weeks in the week ending January 6. Richard McGuire, senior fixed income strategist at Rabobank, said: "We've had a stabilisation in China overnight, but the question remains as to whether China's economy is headed for a hard or soft landing."
China's stock market has suffered its biggest weekly loss since the market crashed last August. The renewed turbulence there has had repercussions globally, contributing to a further decline in oil prices and ensuring a rough ride for stocks. Ten-year German Bund yields were at 0.51 percent, down about 12 basis points from where they ended last year. Yields across the region were 1-5 basis points lower.
"The fact that 10-year German yields are back at around 50 basis points shows there is a flight to quality," said Martin van Vliet, senior rates strategist at ING, adding that supply would probably keep them from declining much in the weeks ahead. Ratings agencies Fitch and Standard & Poor's are expected to confirm their triple-A ratings for Germany later in the day. Alexander Aldinger, rate strategist at Bayerische Landesbank, said oil prices would remain a key driver for bonds in the coming weeks.
The slide in oil prices this week has weighed on market inflation expectations and fuelled a perception that further easing from the European Central Bank may be necessary to meet a 2 percent inflation target. The ECB also has room to do more quantitative easing if economic data over the next few months suggests it's needed, a new member of the central bank's governing council, Philip Lane, was quoted as saying on Friday.
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