European government bonds rise as concern grows over Russian gas supplies

Government bond prices rose on Wednesday as concerns intensified over Russia reducing gas supplies, adding to worries about an economic slowdown.

Germany’s 10-year Bund yield, which moves inversely to its price and is a proxy for eurozone borrowing costs, dropped 0.05 percentage points to 1.23 per cent.

US and UK government debt prices also climbed, in a sign that investors were moving into lower risk assets against a darkening economic backdrop.

The European Commission on Wednesday asked EU member states to cut their gas consumption by 15 percent and set out emergency plans ahead of winter, when it anticipates severe disruption to gas supplies from Russia. German lawmakers are already debating rationing energy use.

Russia’s main gas pipeline to Europe, Nord Stream 1, is expected to reopen on Thursday following a maintenance shutdown. Ahead of that anticipated resumption, Russian president Vladimir Putin commented that capacity may be reduced.

“Our base case is that NS1 restarts and returns to capacity but [state exporter] Gazprom will seek ways to reduce volumes again entering the crucial winter season by preventing Europe from building gas inventories,” said Sean Darby, strategist at Jefferies.

The 10-year US Treasury yield dropped 0.04 percentage points to 2.98 percent.

Long-term UK government debt prices rose after data on Wednesday showed the nation’s inflation rate hit 9.4 percent last month because of soaring fuel and food prices, souring the outlook for the British economy. The benchmark 10-year gilt yield dropped 0.1 percentage points to 2.08 per cent.

At its monetary policy meeting on Thursday, the ECB is poised to raise its main interest rate for the first time since 2011 as it tackles red-hot inflation.

ECB rate-setters were set to discuss an extra-large 0.5 percentage points rise — taking its deposit rate back up to zero for the first time since 2014, but analysts were divided over the likely scale of policy tightening.

“I don’t see 50 basis points tomorrow,” said Sabrina Kanniche, senior economist at Pictet Asset Management. “The growth outlook has deteriorated because of the conflict between Ukraine and Russia and the implications for gas supply.”

The euro was steady against the dollar at just over $1.02.

In stock markets, Europe’s regional Stoxx 600 index edged 0.4 per cent lower. Wall Street’s S&P 500 index was steady in early New York dealings after the US equity gauge posted its biggest daily rise in a month on Tuesday, adding 2.8 percent. The technology-heavy Nasdaq Composite rose 0.6 percent.

Tuesday’s rally had been attributed to a buy-the-dip mood driven by contrarian signals that suggested markets had become overly bearish. The FTSE All-World index of global shares has fallen almost a fifth from its January all-time high. But fund managers have also now slashed their equity exposure to the lowest level since October 2008, according to a Bank of America survey published on Tuesday.

“Our technical contrarian indicators measuring investor sentiment continue to provide strong tactical buy signals for equities,” Credit Suisse strategists wrote in a note to clients.

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