Eurozone government bond yields fell on Thursday, outperforming their US counterparts, as risk aversion rekindled across asset classes. This prompted investors to turn again to European safe havens.
The yield on German 10-year bonds fell 5 basis points to 2,50%, its lowest level in just over a week. These bonds, considered the benchmark for the eurozone, have been among the main beneficiaries of the recent market turmoil related to tariffs, particularly due to some concerns about US Treasuries, according to Reuters.
German yields are currently trading at levels similar to those seen in early March, before the announcement of a historic shift in German fiscal and borrowing policy, which pushed yields above 2,9%.
In contrast, the yield on 10-year US Treasuries was little changed, holding at 4,32% during the day, widening the gap with its German counterpart to 182 basis points, compared to just 140 points at the beginning of April.
Market sentiment weakened Thursday after the United States announced new restrictions on the sale of semiconductors to China, a decision that rekindled tensions on the global trade scene and raised fears of a further escalation of the trade conflict between major powers.
The return of safe havens
Although movements were moderate last week, markets saw a decline in equities and a rise in safe-haven currencies, as the relative calm seen in recent days eased, reviving the appeal of German bonds.
In a note, analysts at ING bank said: "The relative stability of eurozone markets compared to the US could make German bonds an attractive safe haven to hedge against global uncertainties."
They added: "Therefore, we believe German bonds could attract strong demand from global investors in anticipation of future disruptions."
Meanwhile, the bank said U.S. government officials, concerned by recent developments, are seeking to reassure markets, particularly the Treasury bond market. They cited Michael Faulkender, the deputy secretary of the Treasury, as saying Tuesday that officials were considering possible adjustments to the "supplementary leverage ratio" rule, which could allow banks to buy more Treasury bonds.
All eyes on the ECB
The European Central Bank (ECB) meets this Thursday. Although markets anticipate a 25 basis point cut, attention will be focused on officials' statements regarding tariffs and the possibility that they will provide further guidance on the pace of future easing.
Markets are currently pricing in the likelihood of two more interest rate cuts this year, in addition to the one expected at the current meeting, despite growing uncertainty over the still unclear evolution of customs policies.
It is difficult at this stage to fully estimate the impact of tariffs on eurozone growth, nor how falling oil prices, a strengthening euro, or a possible increase in Chinese imports in the event of isolation from US markets will influence inflation.
In other European bond markets, the yield on 10-year Italian bonds fell 4 basis points to 3,69%, while the yield on 2-year German bonds – more sensitive to interest rate changes – fell 4 basis points to 1,73%.
