Bund yields fell towards new lows on Friday, after weak industrial data from Italy and a report saying Germany will cut its economic forecast. The prospect of economic slowdown has dominated the euro zone bond market for much of the week, beginning with weaker- than-expected German industry data and continuing with the International Monetary Fund lowering its economic forecasts.
Yields on German, French, Spanish, Austrian and Belgian bonds all reached record lows on Thursday after minutes of the US Federal Reserve's latest policy meeting suggested it was in no hurry to raise interest rates. They rose early on Friday, after Fed officials played down the minutes. But they resumed their decline after data showed Italy's industrial output rose only 0.3 percent in July, versus a 0.5 percent forecast.
Two German government sources said Germany would cut its economic growth forecasts for 2014 and 2015 next week. "I think Europe is heading into some serious kind of recession. It's pretty much a given. Germany is getting weaker by the minute and Germany was the only thing keeping the euro zone afloat," said Guido Barthels, chief investment officer at Luxembourg-based Ethenea.
German Bund yields, the benchmark for euro zone borrowing costs, were 2 basis points lower on the day at 0.88 percent, just off a record low of 0.859 percent. They traded as high as 0.92 percent earlier. The economic malaise has ratcheted up the pressure on the European Central Bank to embark on further monetary easing. As recession fears spread to the bloc's largest economy, and with Chinese growth also weakening, a buoyant United States faces a more challenging scenario for any move to start raising rates.
The Fed minutes, which said the central bank would wait for a "considerable time" before raising rates after its bond-buying programme ended, prompted some investors to bet the first rate increase would not come until the third quarter of next year. Fed Vice Chairman Stanley Fischer later said "considerable time" meant somewhere between two and 12 months. And San Francisco Fed President John Williams said a mid-2015 rate rise was "a reasonable guess." Portuguese 10-year yields were flat at 2.97 percent before a hotly anticipated announcement from ratings agency Fitch.
Some analysts expect Fitch to lift Portugal's credit rating to investment grade after the market closes on Friday, when ratings agencies may publish revisions of their views on a swathe of euro zone countries, including France, Finland, Spain and Italy. "Overall, we look for further support for our key (euro zone) rating view that an upgrade cycle will unfold slowly but surely," Commerzbank strategists said in a note. "The stage is set this week for Portugal to regain its first investment-grade rating."
Credit Agricole's European head of fixed income, Luca Jellinek, also saw a chance of a Portuguese upgrade, but added that "given recent economic data ... the rating agency could wait for a while." Elsewhere, Italian 10-year yields were 2 bps higher at 2.32 percent while Spanish equivalents were flat at 2.06 percent. Greek yields were 4 bps lower at 6.58 percent, as Prime Minister Antonis Samaras faced a confidence vote in parliament to rally support for his plan to abandon a locally-reviled EU/IMF aid package.