Government bond yields in the Eurozone and the US tumbled on Thursday as uncertainty over US President Donald Trump’s future boosted demand for safe-haven bonds.
Reports that Trump may have had tried to interfere with a federal investigation and that he discussed sensitive security information with Russia have rattled markets in recent days, and a report on Thursday that his aides had numerous undisclosed contacts with Russian officials kept tensions highs.
The allegations surrounding Trump have thrown doubt over the future of the pro-growth policies he has promised and also raised the possibility that he may have to leave the White House prematurely.
“To some extent, people were pinning their hopes on a global reflation trade getting a boost from fiscal stimulus in the States,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.
“The more Trump gets bogged down in the impeachment debate and the issues surrounding that, it reduces the likelihood that you get anything meaningful in terms of fiscal stimulus — that’s the key factor here.” Jittery investors opted for the safety of fixed income, sending the yield on Germany’s benchmark 10-year government bond of Bund down 6 basis points to a two-week low of 0.32 per cent.
US 10-year Treasury yields fell to 2.181 per cent, their lowest level in almost a month, and keeping the gap with Bund yields close to its tightest in six months.
World stocks fell, while other safe-have assets such as the Swiss franc rallied.
US political uncertainty has prompted investors to scale back expectations for a rise in US interest rates next month.
In the Eurozone, expectations for future inflation and the scope for a rate rise from the European Central Bank also fell, reflecting some unease that the political turmoil in Washington could hurt the global economy.
Money markets price in around a 45 per cent chance of an ECB rate hike in early 2018, down from more than 50 per cent earlier this week.
Comments from ECB officials had a muted impact on a bond market fixated for now on US political developments.
The ECB should not wait too long before paring back stimulus once it is convinced that inflation has recovered, and it could in theory raise rates early if necessary, ECB board member Benoit Coeure said.
Minutes from the ECB’s April meeting are released later in the day, while ECB chief Mario Draghi is expected to speak.
“US politics is still the main in show in town,” said Rabobank fixed income strategist Lyn Graham-Taylor.
Most Eurozone bond yields were 2-5 bps lower, extending recent falls on the back of fading political risks in the euro area and brighter economic data in the bloc.
Institutional investors snapped up 1 billion euros of Italy’s new “BTP Italia” bond, maturing in May 2023, in the first 10 minutes of trading on Thursday. That followed strong demand in French and German long-dated bond auctions this week.
Data from Japan’s Ministry of Finance released on Thursday showed Japanese investors’ appetite for foreign bonds picked up in the latest week as they bought the most in 10 months, reassured by the outcome of France’s presidential election.