During the week, in contrast to the rest of the month, there was a positive net offering in the primary market for European government bonds. There were new issuance from Germany, Spain and France totalling around EUR 17 billion.
Given a rising volume of maturities ahead, net supply should turn negative again soon. It is expected that the European Central Bank will reinvest these backflows from its bond portfolio, which will create some demand during the traditionally less liquid summer period.
Disappointing European core inflation data released on Wednesday further diminished the market’s interest rate hike and inflation expectations, thereby limiting the threat of rising yields as well. The escalation of the trade dispute as well as concerns about the Italian political situation, which choked risk appetite during the first half of the year, are still influencing investors. Risk premiums in the eurozone periphery, emerging markets and corporate bonds are still high compared to the start of the year, even though some relief was seen since the end of June. As long as political risks remain, demand for quality will likely remain robust.
On the other hand, Bund yields are still trading at comparably low levels and the potential for another rally seems unlikely. During the last 18 months, yields could not remain below 30 basis points. Consequently, Bund yields will likely remain in a tight yield range.
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