Highly rated government bonds rally sharply in flight to safety
German Bund yields strike lowest level since April 2017
Government bonds kicked off the year with a sharp rally with investors darting into ‘havens’ amid a global flight from risk sparked by disappointing data on China’s sprawling manufacturing sector.
Buying in German and British sovereign paper was particularly vigorous. The 10-year German Bund yield dropped 7.1 basis points to 0.173 per cent — the lowest level since April 2017. UK gilts of the same maturity also rallied, sending yields down 6.1 basis points to 1.209 per cent.
In early US dealings, the 10-year Treasury yield fell 3 bps to 2.661 per cent.
Wednesday’s moves came as global equities bourses sustained a blow after the worst year since the financial crisis. Europe’s Stoxx 600 dropped 1.1 per cent, tracking losses across Asia. Hong Kong’s Hang Seng was hit especially hard, dropping 2.8 per cent in its worst day since October.
China’s factory sector contracted for the first time since May 2017, according to a survey conducted by IHS Markit for Caixin Media. The report echoed an official survey published by China earlier this week.
The data pointed to “soft growth momentum in the manufacturing sector in December,” said Maggie Wei, economist at Goldman Sachs. “Trade growth may have weakened and domestic demand growth could have stayed soft.”
Signs of weakness in China’s economy highlight how themes that sparked uncertainty among investors in 2018 have bled into the new year.
In addition to persistent trade tensions, investors are also keeping close tabs on a partial government shutdown in the US that began almost two weeks ago.
The shutdown, which was sparked by a disagreement between President Trump and Democrats in the House of Representatives over the funding of a border wall, has left thousands of federal workers at home without pay and shut museums and national parks. It has added to the sense of unease over US policy.
Investors have now discounted the Federal Reserve increasing interest rates at all this year. The odds of no rate rises were 75 per cent on Wednesday, according to CME Group calculations based on federal funds futures. A month ago, the implied probability of no rise this year was 25 per cent.
Other assets that are considered to be shelters during times of unease also shined on Wednesday. The Japanese yen was up 0.66 per cent on the US dollar at ¥108.99 while gold rose 0.44 per cent to $1,288 a troy ounce.