Euro zone government bond yields hit multi-week lows on Tuesday as geopolitical tensions from the Middle East to the US pointed to slower price growth.
A diplomatic rift between Qatar and several Arab states including Saudi Arabia has depressed oil prices as it could undermine efforts by the Organization of the Petroleum Exporting Countries (OPEC) to tighten the market.
Combined with doubts about the US economy and about President Donald Trump’s ambitious spending plans, the oil slide is clouding the outlook for price growth globally.
In turn, this weak outlook is keeping demand high for bonds, despite the fact that the European Central Bank (ECB) on Thursday is expected to take a more benign view of the economy and potentially close the door to further stimulus.
“There is a general risk aversion theme going on,” said Mizuho’s head of euro rates strategy, Peter Chatwell.
“The evolution of data in the US has also justified the drop in global government bond yields, and is why investors in Europe feel comfortable at these levels.”
Britain’s election on Thursday, which a minority of pollsters indicates could result in a hung Parliament, is also spreading a cautious tone across markets in general.
Europe’s benchmark German Bund yields fell to their lowest level in nearly six weeks at 0.262 percent, while French equivalents fell below 0.70 percent for the first time since early January.
The drop in French yields also follows a vote for lawmakers representing French who live abroad that was another indication that President Emmanuel Macron’s party is set to win a majority in the parliamentary election this month.
But the fall in yields was widespread across euro zone markets. Spanish 10-year yields dropped as much as 5 bps to 1.53 percent, just above four-month lows.
Oil prices have shed around 8 percent over the last 10 days — a slide that has further eroded long-term inflation expectations in the euro zone.
The five-year, five-year forward rate has slid more than 20 bps since the start of the year to below 1.6 percent — well short of the ECB’s near-2-percent inflation target.
Adding to the political tension, former FBI chief James Comey is due to testify before the US Congress on Thursday, and could discuss his conversations with US President Donald Trump about an investigation into former National Security Adviser Mike Flynn, who was fired for failing to disclose conversations with Russian officials.
Investors see this as a distraction for Trump, who they are banking on to reflate the stuttering US economy with ambitious spending plans.

Source: Arab News