Government bond yields in the eurozone hovered near record lows on Friday, reflecting heightened expectations for European Central Bank (ECB) easing soon and concern about global recession risks.
Ten-year bond yields in Germany and Italy were poised to record their biggest weekly falls since mid-2018, while Spanish 10-year yields, down 23 basis points this week, are on track for their biggest weekly fall since 2016.
ECB policymaker Olli Rehn on Thursday flagged the need for a significant easing package in September, sending yields across the bloc to new lows.
Alongside increasing concern about global recession risks, fueled after the US bond yield curve on Wednesday inverted for the first time in 12 years, this has meant another stellar week for world bond markets where prices have shot up -- pushing yields down.
“The underlying concern and drivers such as a recession and the expectation for an aggressive policy response, fueled by Rehn's comments yesterday, has given the bond market another boost at already elevated levels,” said Commerzbank rates strategist Rainer Guntermann.
In early trade, most 10-year bond yields in the euro area were flat to a touch lower on the day. Germany's 10-year bond yield hovered near a record low hit on Thursday at -0.714 percent and is down around 12 basis points this week.
In Italy, speculation that the ECB will cut rates and unveil other easing measures at its September meeting has helped the bond market recover from sharp selling a week ago after the prospect of a snap election moved back into focus.
Italian 10-year yields are down almost 45 bps this week and were a touch higher on Friday at around 1.36 percent, still holding near their lowest levels in almost three years.
Analysts also noted a sharp tightening in the gap between swap spreads and German bond yields this week, in a sign that markets were lowering the scarcity premium attached to holding German bonds and positioning for fiscal stimulus in the euro area.
And while many expected bond yields to remain at ultra-low levels, some believed market concern about recession risks -- reflected in the inversion of the US 2-10 year yield curve this week -- were overdone.
“We don't see a recession coming 'imminently' even though the US yield curve has inverted,” said Fahad Kamal, chief market strategist at Kleinwort Hambros. “Bonds remain hideously expensive.”