By John Geddie
Europe’s top-rated government bond yield fell to a six-week low on Wednesday as tensions between North Korea and the United States firmed investor demand for so-called ‘safe haven’ assets.
North Korea said on Wednesday it is considering plans for a missile strike on the U.S. Pacific territory of Guam, just hours after President Donald Trump told the North that any threat to the United States would be met with “fire and fury”.
Pyongyang has made no secret of its plans to develop a nuclear-tipped missile able to strike the United States, which it says are a legitimate means of defence against perceived U.S. hostility, including joint military drills with South Korea.
The escalation in rhetoric jarred financial markets, prompting investors to shelter their cash in assets that tend to perform in times of stress.
The yield on Germany’s 10-year government bond – the bloc’s benchmark, which has the top Triple-A credit rating – fell with U.S. equivalents, the main beneficiaries alongside gold and the Japanese and Swiss currencies.
“Trump’s comments about North Korea have created nervousness and the fear is if the President really means what he said: ‘fire and fury’,” Naeem Aslam, chief market analyst at Think Markets in London, said. “The typical textbook trade is that investors rush for safe havens.”
Bund yields fell 4 basis points to 0.43 percent, its lowest since June 30. Yields fall when prices rise.
U.S. equivalents fell 4 bps to 2.24 percent.
Martin van Vliet, a senior rates strategist at ING, said the market move in German bonds was exacerbated by speculative bets on futures derivative contracts, rather than actual trading in the underlying assets.
“I don’t want to downplay the moves, but I don’t think most investors think military action is imminent,” van Vliet said.
At the auctions, Germany sold just over 3 billion euros of five-year bonds on Wednesday.
There was little market reaction to inflation data from China, the world’s second-largest economy, which showed prices holding steady in July in a positive sign for industrial output and profits for the third quarter.
Despite brightening growth, inflation has been sluggish in major economies including the United States, Europe and Japan, keeping policymakers cautious over tightening monetary policy.