* Pan-European share index down more than 1%
* E-Minis for S&P500 fall 0.6%
* U.S. Treasury yields at the lowest since September 2017
* German Bund yields at 2-1/2-year lows
(Updates prices, adds charts)
By Sujata Rao
LONDON, May 29 (Reuters) - The global bond rally accelerated
on Wednesday, sending 10-year U.S Treasury yields to 20-month
lows, as investors fearful of the fallout from the Sino-U.S.
trade war sold shares and scurried for the safety of German and
U.S. government debt.
U.S. 10-year yields are down almost 30 basis points this
month, while German yields slipped deeper into negative
territory to the lowest in almost three years.
Wall Street was set to open lower, with S&P500 futures down
0.7% ESc1 , still feeling the effect of U.S. President Donald
Trump's comment that he was "not yet ready" to make a deal with
China over trade.
Chinese newspapers responded on Wednesday with a warning
Beijing could use rare earths to strike back at the United
States. China is a major producer of rare earths, which are used
widely in electronics and military equipment.
The prospect of a prolonged standoff between the world's two
biggest economies and the likelihood of Europe and Japan getting
dragged in, are making investors seriously worried about
economic growth.
Recent data, such as purchasing-manager surveys, have
disappointed and another round of tariffs would sharply raise
U.S. recession risk, said Justin Onuekwusi, a fund manager at
Legal & General Investment Management.
"The market is simply calculating what the impact will be of
the next set of tariffs as it doesn't look like the rhetoric is
calming down," Onuekwusi said.
"Then we have a weaker growth outlook ... so we have the
negative shock of trade added to lower growth, and the cushion
of protection isn't as good as it was eight to nine months ago."
Those concerns pushed MSCI's global equity index 0.5% lower
to 2-1/2-month lows <.MIWD00000PUS and put it on track for its
first lossmaking month of 2019.
Asian markets too fell .MIAJ0000PUS .N225 .AXJO while
in Europe, Germany's exporter-heavy index slumped 1.4% .STOXX
.GDAXI and a pan-European benchmark lost 1.3%.
U.S. bond and equity volatility is also on the rise
.MERMOVE .VIX .
On the political front too, many fear eurosceptic parties'
strong showing in EU elections could allow them to hamper
crucial legislation; Austria and Greece face elections; and
Italy's dispute with the European Commission over its budget may
be escalating. RALLY ACCELERATES
All these concerns have given fresh legs to the rally in
government bonds, which will also benefit from interest rate
cuts if the growth outlook worsens.
U.S. 10-year yields US10YT=RR are now about 13 basis
points below 3-month rates, an inversion typically seen as a
leading indicator of a recession.
The inversion is the deepest in almost 12 years, exacerbated
by recent weak U.S. data on manufacturing and industrial output.
U.S. rates futures are pricing two interest rate cuts by
mid-2020. FEDWATCH
"Typically when the yield curve inverts you get central bank
easings. So the question about recession would be: would the
U.S. Fed ease enough to avoid a recession?" said Chris Rands,
portfolio manager at Nikko Asset Management.
"The fact that you have got a bit more noise around the
trade war now at the same time as manufacturing is rolling over
-- it's getting people to think that things are a little bit
worse than they had expected," he said.
The gap between two and 10-year German Bund yields was the
narrowest in almost three years. Ten-year Bunds now yield minus
0.17% and are down 10 bps since the start of May DE10YT=RR
DE2DE10=RR .
Bunds are benefiting also from tensions between Italy and
the EU, which is said to be considering punishing Rome for
excessive spending.
Regardless of Italian risks, the rally spread to the riskier
southern European countries, where Spanish and Portuguese
10-year yields hit record lows and Italian yields fell five bps
IT10YT=RR .
Onuekwusi said he preferred Italian and Spanish bonds over
their negative-yielding German counterparts. The EU is unlikely
to impose too severe a punishment on Italy, he argued.
"If you look at Europe's political landscape, the last thing
the (EU authorities) would want to do is to stir up any more
negative EU sentiment," he said.
On currencies, the dollar index .DXY was set for a fourth
straight month of gains, benefiting from flows away from markets
such as Asia that are considered at greater risk from a trade
war.
The euro EUR=D3 was unchanged at $.1.117 after falling two
straight days. The British pound GBP=D3 held at $1.2643.
Commodity markets were also dominated by fears of economic
downturn, with Brent crude LCOc1 off almost 2% at $68.79 per
barrel. But gold benefited from the safe-haven bid, rising 0.3%
to $1.282 an ounce XAU= .
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bond and equity vol on the rise https://tmsnrt.rs/2IiffRh
Investors pile into Southern European debt https://tmsnrt.rs/2WaH7QR
U.S. Yield Curve http://tmsnrt.rs/2zUqXiW
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