German bunds gain on weak risk appetite; 10-year yield dips to minus 0.15 pct

The German bunds gained on Tuesday as investors poured into safe-haven instruments amid losses in riskier assets including crude oil and stocks, pushing the yield on 10-year bund to -0.15 percent for the first time since 24 June and likely to test its intraday low of -0.17 percent soon.

The equity market bounce last week may have run its course, but in any case, upcoming economic data will increasingly reflect post-UK referendum gloom as already manifested in the drop in the Sentix indicator to a one and half year low.

The yield on the benchmark 10-year bond fell nearly 2 basis points to -0.154 percent, yield on super-long 30-year bonds dipped more than 3 basis points to 0.372 percent and the yield on short-term 2-year note slid 1/2  basis point to -0.670 percent by 08:45 GMT.

The drop in the July Eurozone Sentix index to 1.7 from 9.9 in Jun and against the consensus expectation of 5.0, reveals the extent to which the UK’s decision to leave the EU has started to adversely impact investors’ sentiment in the Eurozone. The fall in the future expectations sub-index, as well as the equivalent for Germany, to 2.7 from 7.9 in Jun, in particular point towards a likely drop in the German headline ZEW investor sentiment indicator for July, from 19.2 in June, when the latter’s survey is published later in the month.

The ECB executive board member Sabine Lautenschlaeger said that she sees no reason for further rate cuts, considering the cost-benefit balance and that monetary policy is already extraordinarily expansive. Similarly, the Bundesbank President Jens Weidmann said that he sees no need for further policy easing in response to Brexit; monetary policy cannot address political uncertainty.

Importantly, our analysis concludes that Lautenschlaeger, along with her fellow German governing council member Weidmann, are probably the most hawkish policymakers at the ECB. Although it is a close call, we look for a final deposit rate cut in September, and can't rule it out coming as soon as 21 July if economic conditions deteriorate quickly.

In terms of data, German Markit service PMI came at 53.7 in June, bit higher than the market consensus of 53.2, but lower than the previous of 55.2 in May. Similarly, Eurozone Markit service PMI came at 52.8, marginally higher than investors consensus of 52.4, but also lower than the previous reading of 54.4 in May.

Lastly, the German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Today, crude oil fell below $50 a barrel as concern about a potential slowdown in economic growth that would weigh on demand trumped supply outages in Nigeria and other exporting nations. Also, Trade in one of Britain's largest property funds was suspended in one of the first signs of major financial stress following the country's vote to leave the EU. A flurry of data from China in coming weeks is expected to show weakness in trade and investment.

Meanwhile, the International benchmark Brent futures fell 2.16 percent to $49.03 and West Texas Intermediate (WTI) dipped 2.63 percent to $47.70, the German stock index DAX Index fell 1.31 percent at 9,581.5 by 09:05 GMT.