Top-rated German bond yields rose on Tuesday as investors favoured riskier stocks after weak Chinese data fanned hopes for more monetary stimulus. Markets were seen in "risk on" mode after data showed that China grew at its slowest rate in a quarter of a century in 2015 and industrial and retail sales data missed forecasts. Further evidence of a slowdown in the world's second-largest economy not only firmed bets of a policy response from Beijing but also upped the pressure on the European Central Bank to protect the euro zone's fledgling recovery from China's malaise.
A survey on Tuesday showed that the mood among German analysts and investors darkened in January as worries about China and other emerging markets continued to hit Europe's largest economy. "While there's been a bit of a bounce back in risk appetite and oil prices, it's premature to suggest the worst is over," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.
"Consequently the correction we've seen in core government bond markets is likely to be short-lived until we see signs that oil prices have stabilised and central banks are taking more decisive action to support their economies." German 10-year bond yields, viewed as a safer haven in times of market turmoil, rose 1.5 basis points (bps) to 0.485 percent, but off the day's high just above 0.50 percent. Yields elsewhere in the euro zone were largely steady.
Euro zone stocks were up 1.3 percent, tracking an earlier rise across Asian shares. ECB policymaker Ilmars Rimsevics said on Monday that Europe was too relaxed about the prospect of contagion from China. It could result in sagging demand for European exports while further easing from China should weaken the yuan and serve to export China's deflationary pressure. This is a big headache for the ECB, which is struggling to boost inflation that has been tugged down by another slide in oil prices.
Long-term inflation expectations as measured by five-year, five-year breakeven forwards are at their lowest levels since early October, at about 1.6 percent. The measure, which shows where markets expect 2026 inflation forecasts to be in 2021, has fallen more than 20 bps since the December highs. Financial markets see roughly a 50 percent chance that the ECB will cut interest rates further at its March meeting. Though China is likely to be discussed at length at Thursday's ECB session, markets do not expect more stimulus to be announced. Finland meanwhile sold about 1.5 billion euros of bonds maturing 2020 and 2042 at an auction. Analysts said the auction was well received, giving Finnish bonds some support.