LONDON: Germany’s benchmark 10-year bond yield fell to a two-month low on Tuesday, with concerns about a sharp economic slowdown kept alive by news that Russia would cut gas supplies to Europe from Wednesday.

The yield has slid more than 30 basis points (bps) in July and is set for its biggest monthly drop since 2012, as market attention turns from record-high inflation to the possibility sharp economic slowdown or possible recession.

Such concerns have been stoked by an energy crisis and concern about gas supplies to Europe since Russia’s invasion of Ukraine in February. Russia tightened its gas squeeze on Monday. Gazprom said supplies through the Nord Stream 1 pipeline to Germany would drop to just 20% of capacity.

According to Deutsche Bank, at 40% capacity Germany could make it through the winter but at 20% some notable rationing would likely be needed.

Ten-year Bund yields fell more 3 bps to just under 1% , hitting their lowest levels in two months, and falling below a Friday low that followed release of weak euro area business activity data.

“Markets are reading much more into data right now. We had a back up in yields yesterday, but it didn’t last long,” said Pooja Kumra, European rates strategist at TD Securities.

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“Focus will be on the EU and whether they start to impose rationing.” EU energy ministers are expected to meet on Tuesday to discuss energy supplies and possible measures to be taken ahead of the winter.

Analysts noted that, with Tuesday marking a decade since former ECB chief Mario Draghi committed to doing “whatever it takes” to save the euro, Europe was again facing a challenging moment, given high inflation, an energy crisis and political instability in Italy.

“Ten years (to) the day after Draghi’s historic “whatever it takes”, (Italian) BTPs are still in need of ECB protection against political and fundamental uncertainties,” Commerzbank rates strategist Rainer Guntermann said.

Most 10-year bond yields were down 4 to 5 bps on Tuesday, with Italian yields trading at 3.34%, their lowest level in almost a week.

With the US Federal Reserve beginning its two-day meeting later on Tuesday, caution was expected to limit market moves. The Fed is widely expected to hike its benchmark rate by 75 bps for a second straight month to contain inflation.

“If they (the Fed) wanted to do 100 bps, they would have said something, so we feel 75 bps is likely tomorrow,” said Kumra at TD Securities.