Euro zone government bond yields fell on Monday after data showed the U.S. manufacturing sector weakened dramatically in March.
The German 2-year bond yield , which is highly sensitive to changes in interest rate expectations, was last down 4 bps to 2.662%. Yields move inversely to prices.
U.S.
manufacturing activity slumped to the lowest level in nearly three years in March as new orders continued to contract, according to survey data from the Institute for Supply Management (ISM).
Yields were higher before the U.S. data, after the OPEC+ group of oil producers
announced further cuts to production, causing oil prices to spike and raising concerns about further inflation.
"The miss in US ISM manufacturing is catching bond markets off guard," said Antoine Bouvet, head of European rates strategy at ING.
"The tone for most of today was bearish after OPEC+ production cuts sent oil higher and bonds lower. The miss in ISM means markets may well conclude that higher oil prices won't result in faster inflation if activity is on the decline already."
Germany's 10-year bond yield , the benchmark
for the bloc, was last down 6 bps to 2.25%.
That was well below the more than 11-year high of 2.77% touched at the start of March, but up from a three-month low of 1.923% on March 20.
Jitters in the global financial system have caused bond yields to tumble over the last month. Investors have rushed towards the safety of government bonds and traders have dialled down their expectations of how high central banks can hike interest rates.
Italy's 10-year bond yield was last down 2 bps to 4.101%. It stood at 4.645% in early March.
The gap between Italian and German 10-year borrowing costs - a gauge of investor confidence in the more indebted countries of the euro zone – widened to 184 bps on Monday.
"The (U.S.) weaker economic activity is good news for inflation and the trajectory of interest rates, a natural support to equities and credit," said Florian Ielpo, head of macro at Lombard Odier Asset Management.
Despite the banking concerns, traders last week revised up their expectations for the peak level of European Central Bank (ECB) interest rates, after core euro zone inflation - which strips out energy and food prices - hit a fresh record high.
On Monday, pricing in derivatives markets suggested traders expect rates to peak at around 3.6% in November, from 3% currently.
Investors previously envisioned a peak rate of around
4.1% later this year, but that fell closer to 3% in the middle
of March as the banking system wobbled.
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(Reporting by Harry Robertson and Stefano Rebaudo, editing by
Ed Osmond and Andrew Heavens)
