Eurozone bond yields fall as stocks drop

As two-year British gilt yields tumbled 10 basis points, they dragged eurozone bond yields with them

Eurozone bond yields fell on Tuesday as sliding stock markets and news of a sharp slowdown in UK business activity offered investors a respite from the increasingly hawkish messages coming from the European Central Bank chief. On another day of volatile trade, borrowing costs were pushed in one direction and then another by conflicting forces.

But it was the combination of poor UK data and weak stocks that appeared to hold sway for now. Momentum in Britain's private sector slowed much more than expected this month, adding to recession worries as inflation pressures ratcheted higher, according to a business survey.

As two-year British gilt yields tumbled 10 basis points (bps), they dragged eurozone bond yields with them.

The weak equity backdrop was already supportive for bonds and then we had the dreadfully weak UK PMI data, which has seen UK gilt yields drop like a stone, said Richard McGuire, head of rates at Rabobank.

Germany's benchmark 10-year Bund yield was last down 3 bps on the day at 0.99%, having pushed above 1% earlier. Italian 10-year bond yields were also 3 bps lower after rising to a two-week high earlier in the session after the latest comments from ECB boss Christine Lagarde kept markets alert to rate hike risks.

Lagarde said on Tuesday she saw the ECB's deposit rate at zero or ‘slightly above’ by the end of September, implying an increase of at least 50 basis points from its current level. The comments came a day after Lagarde accelerated a policy turnaround that has seen her go from all but ruling out a move this year to pencilling in several hikes. The ECB's key depo rate is at -0.50%.