November 14, 2019 / 9:02 AM / a month ago

Euro zone bonds shrug off German GDP reading

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Yoruk Bahceli

LONDON, Nov 14 (Reuters) - Euro zone government bonds shrugged off a report of economic growth in Germany that showed the country avoided a recession last quarter.

The German economy escaped a recession in the third quarter, when output unexpectedly grew 0.1% quarter-on-quarter, driven by consumer spending, preliminary data showed on Thursday.

Germany’s economy shrank 0.1% during the second quarter, and a Reuters poll had forecast it would shrink the same amount in the third quarter — one of the reasons for the pessimism over the euro zone economy that has kept bond yields in deeply negative territory. A flash reading for euro zone GDP is due at 1000 GMT.

“Obviously, it’s better than expected; Germany didn’t enter into a technical recession, [but the] market seems to have shrugged it off,” said Lyn-Graham Taylor, a fixed-income strategist at Rabobank.

German Economy Minister Peter Altmaier warned that economic development remained fragile.

Most 10-year euro zone bond yields were down around 2 basis point in early trade, with Germany’s 10-year benchmark at -0.32%.

The rally sent France’s 10-year yield back into negative territory a week after turned positive for the first time since July.

“The picture of weak growth remains unchanged and should contribute to keeping core yields subdued in the medium term,” UniCredit analysts said in a note.

Focus remains on U.S.-China trade tensions, with the Wall Street Journal reporting that talks have “hit a snag” over farm purchases.

China’s factory output growth also slowed more than expected in October.

The drop in Germany’s 10-year bond yield on Wednesday was the biggest daily decline since September. It came after U.S. President Donald Trump threatened to raise tariffs on China if it failed to sign a trade deal, dimming the optimism that had hurt bond markets in recent weeks.

“That this occurred on the back of Trump delivering very little new information either way is a sign that expectations (regarding the trade deal) had built to levels nearing certainty,” ING analysts said in a client note.

Elsewhere, the volumes behind the euro zone’s new unsecured overnight lending benchmark, ESTR, fell on Wednesday to 23 billion euros compared with 30 billion euros a day earlier, according to data from the European Central Bank.

The number of active banks behind ESTR fell from 30 to 20, with the share of the five most active banks increasing to 70% from 57%, suggesting that smaller banks may have dropped out from the market.

Reporting by Yoruk Bahceli

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