LONDON: Most euro zone government bond yields inched lower on Thursday as nagging concern about a weak economy and the risk of an early election in Spain buoyed demand for higher-rated debt markets.
Data on Thursday showed Germany just escaped recession in the final quarter of 2018 while the broader euro zone economy grew just 0.2 percent quarter-on-quarter.
Having briefly risen after the German data came out in early European trade, yields drifted back down.
With German 10-year bond yields at just 0.11 percent , having touched their lowest levels in over two years last week, investors appeared to be moving into other higher-rated bonds.
Belgium's 10-year government bond yield, for instance, was down four basis points on the day at 0.69 percent. Ireland's 10-year bond fell two bps to 0.88 percent, outperforming German and French peers - down about a basis point each.
"Investors are eager for a yield pick up and German yields are low and lower for longer so better credits with a higher yield are benefiting," said Commerzbank rates strategist Rainer Guntermann.
Bond yields in the bloc's top-rated economies have fallen sharply this year as a string of weak economic data and cuts to 2019 growth forecasts prompted investors to reassess both the economic and monetary policy outlook.
Germany's economy did not grow in the final quarter of 2018, data showed, compared with a Reuters forecast for growth of 0.1 percent. It escaped recession by the narrowest of margins after contracting in the July-September period for the first time since 2015.
"The whisper estimate was even lower, so that's why the immediate reaction was a rise in yields," said Norbert Wuthe, rates strategist at Bayerische Landesbank.
"There are basically two things weighing down yields at the moment - Brexit uncertainty and, in the past six weeks, increased attention to negative data surprises and their possible repercussions for the ECB (European Central Bank).
Uncertainty in Spain also boosted safe-haven bonds, analysts said.
Spain's parliament rejected a draft 2019 budget on Wednesday after Catalan separatists turned their back on the government, pushing the country close to an early national election.
"Elections would not concern us in the long-term, as whether they take place or not, there is still uncertainty either way," said Peter McCallum, rates strategist at Mizuho.
He said snap elections would likely spark a sell-off in Spanish bonds, which should recover if fresh polls resulted in a centre-right coalition and a more market-friendly fiscal policy.
Spain's 10-year bond yield was marginally higher at 1.24 percent, pushing the gap over German Bund yields to almost 112 bps from 109 bps late on Wednesday.
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