German government bonds advanced, pushing the 10-year yield to the lowest in almost a year, as concern the global economic recovery is stalling sent stocks lower and boosted demand for the safest assets.
Ten-year German bonds gained for a fourth day as Morgan Stanley lowered its growth forecast for the euro area and European Central Bank Governing Council member Ewald Nowotny said he was fearful of a period of slow growth and low inflation.
The Stoxx Europe 600 Index of shares fell 2.4 per cent, while US equity futures slid before a government report that economists expect will show the cost of living in the USbarely rose in July. Greek and Portuguese bonds slid.
"We have growth concerns, that's for sure," said Peter Schaffrik, head of European interest-rate strategy at RBC Capital Markets in London. "There's a realisation that with low rates for longer comes a flatter curve. That's driving the bunds up. On top of that there's a bit of concern over everything peripheral."
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Ten-year bund yields fell six basis points to 2.15 per cent at 11:32am in London, after reaching 2.14 per cent, the lowest since September 1.
The 3.25 per cent security due July 2021 gained 0.525, or €5.25 per €1,000 ($1,443) face amount, to 109.705. Yields on 30-year bonds dropped six basis points to 3.03 per cent and two-year note yields were five basis points lower at 0.65 per cent.
A "benign inflation outlook would allow the ECB to reverse the course of its monetary action and start to cut interest rates in early 2012," Morgan Stanley economists including Elga Bartsch wrote in a note to clients. They predicted that the ECB will lower its benchmark rate to 1 per cent by the end of 2012, from 1.5 per cent.
"My personal fears are focused on a different direction, a Japanese one," Nowotny was quoted as saying in an interview in Austrian daily newspaper WirtschaftsBlatt. That means a "long-term period of limited economic growth combined with low inflation rates," he added in the interview.