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Euro zone bond yields tumbled on Friday as traders shrugged off a record inflation reading and instead stormed into government debt on renewed fears of a recession.
The moves lower accelerated in the afternoon session after U.S. Treasury yields tanked, not helped by data showing U.S. manufacturing activity slowed more than expected in June.
The drop in yields came as euro area inflation hit a record high of 8.6% in June. The reading failed to trigger forecasts of a more aggressive monetary tightening path.y
"Rates remain around their recent lows as inflation data did not bring relief to investors' concerns on growth," said Luca Cazzulani, head of strategy research at UniCredit.
Spreads between peripheral and core government bond yields narrowed, as expectations that the European Central Bank would step in with support to help peripheral countries grew.
Germany's 10-year government bond yield slipped nearly 20 basis points (bps) from Thursday's close to as low as 1.16%, its lowest since June 1, after rising briefly to as high as 1.41% following the inflation data. DE10YT=RR
Two-year yields also dropped sharply, losing more than 30 basis points since Monday in their biggest weekly decline since March DE2YT=RR.
According to ING analysts, "with a high risk of the euro zone economy falling into technical recession towards the end of the year and inflation coming down in 2023, there will be hardly any room for the ECB to deliver additional hikes in 2023."
Italy's 10-year bond yield dropped as much as 20 bps to 3.19% before recovering. The spread between Italian and German 10-year yields was last at 196 bps. IT10YT=RRDE10IT10=RR
In the United States, benchmark Treasury yields US10YT=RR skidded more than 20 basis points to around 2.8%, one of the biggest one-day moves since 2020.
Analysts flagged a divergence between yield spreads of government bonds and the credit market.
The Italian-German spread showed resilience recently, as it kept fluctuating around 200 bps.
At the same time, the iTraxx Europe Crossover index, which measures the cost of insuring exposure to investment grade European corporate high yield bonds, rose above 120 basis points on Thursday for the first time since March 2020. ITEEU5Y=MG
"The major decoupling from credit spreads suggests that so far the ECB's anti-fragmentation efforts are achieving the desired effect," Commerzbank analysts said.