German bund yields hit new record low

June 8, 2016

The German 10-year bund yields fell to a new record low on Wednesday, after testing its 2015 low of 0.05 percent yesterday, are likely to test zero as soon as this week, especially if the 10-year US Treasury yield finally breaks through 1.70 percent mark.

Concerns about the Brexit vote on 23rd June referendum shifted investors towards safe-haven buying.

Also, rising uncertainty about developments in China and other emerging markets boosted fixed income demand. On the contrary, crude oil prices scaled beyond the $50 mark in the Asian session, which limited the fall in bond yields.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell 2 basis points to 0.038 percent by 08:50 GMT.

The recent polls showed the outcome of the referendum is too close to call, raising the possibility that Britain might leave the EU after 43 years of membership in the bloc. A new UK-EU poll by ORB for the Telegraph, among people saying they will definitely vote in the referendum on the 23rd, 48 percent said they will vote to remain and 47 percent to leave the union.

According to the latest poll conducted by YouGov on the weekend over the ‘Brexit’ referendum, 43 percent voted to 'remain' in the European Union, compared to 41 percent as of May 31, 42 percent voted to 'leave' the EU, compared to 41 percent on May 31. The rest remained indecisive, either declining to vote or not knowing which side to favour.

Moreover, the WTO director general Azevedo said that the UK business competitiveness will be badly hit if the country votes to leave the EU. He adds that although trade will continue, it could be on worse/costlier terms.

In addition, the World Bank lowered its 2016 global growth forecast to 2.4 percent from the earlier forecast of 2.9 percent in January due to stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows.

Last week, the German central bank (Bundesbank) also lowered its economic growth and inflation forecast in its latest report published on Friday. They cut 2016 GDP forecast to 1.7 percent, as compared to 1.8 percent forecast in December. For 2017 it reduced GDP forecast to 1.4 percent, from 1.7 percent in its previous estimates, for 2018 growth it made an initial forecast of 1.6 percent.

Similarly, it lowered the 2016 inflation forecast to 0.2 percent, from 1.1 percent in December, 2017 inflation forecast was also lowered to 1.5 percent, as compared to 2.0 percent in its earlier forecast and for 2018 it made an initial forecast of 1.7 percent.

Chinese exports fell for the month of May, worse than markets had anticipated on slowed demand for Chinese products in the overseas market. Imports, however, improved beyond market anticipation. Exports fell 4.1 percent last month in dollar terms from the same period a year ago to USD181.1 billion following a 1.8 percent decline in April and leaving a trade surplus of just under $50 billion, the figures showed. Meanwhile, imports fell 0.4 percent in May, a sharp improvement from -10.9 percent in the previous month, data released showed Wednesday.

Moreover, China’s imports have been shrinking quite at a fast pace since late 2014 as the economy is facing contraction pressures, buoyed by a slowdown in manufacturing capacity, a slowing housing market and increasing debt burden. The world’s second-largest economy remains a key driver of global growth and a major source of demand for countries like Australia and Nigeria. Trade surplus came in at USD 49.98 billion in May, missing estimates for USD 55.7 billion.

The German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Today, crude oil prices jumped beyond $50 mark by hitting 2016 high as supply disruptions in Nigeria and likely declines in the U.S. crude inventories and production fuelled bullish sentiment. The International benchmark Brent futures rose 0.08 percent to $51.48 and West Texas Intermediate (WTI) jumped 0.20 percent to $50.46 by 05:15 GMT.

Meanwhile, the German stock index DAX Index down 0.56 percent at 10,230 by 9:00 GMT.

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