German bunds snap two days of rally as Brexit news sinks in

The German bunds snapped two days rally on Tuesday as investors paused to digest the implications of Britain’s decision last week to leave the European Union. Also, traders cooled on safe-haven instruments amid gains in riskier assets including crude oil and equities.

The yield on the benchmark 10-year bonds, which moves inversely to its price rose more than 2 basis points to -0.080 percent, yield on super-long 30-year bonds jumped more than  4 basis points to 0.339 percent and the yield on short-term 2-year note climbed more than 1/2 basis points to -0.642 percent by 09:40 GMT.

The German bunds have been closely following developments in oil markets because of their impact on inflation expectations. Today, oil prices rose as investors took advantage of a two-day slide in crude following Britain's vote to leave the European Union to lock in lower prices. A looming strike at several Norwegian oil and gas fields threatened to cut output in western Europe's biggest producer, also helped support prices on Tuesday. The International benchmark Brent futures rose 1.78 percent to $48.61 and West Texas Intermediate (WTI) climbed 1.81 percent to $47.17 by 09:40 GMT.

Germany's Merkel tells Bundestag she regrets Brexit decision of British people and everyone should respect Brexit decision. Said Europe has got through many crises and challenges in the past and EU is strong enough to withstand Brexit. Said Germany has special interest in European unification succeeding and it is up to the UK to says how it wants to shape its future with Europe. She further added that Germany will remain a close partner in NATO and wants to maintain close relations with UK.

Moreover, ECB's Draghi said that global economy can benefit from alignment of policies and Europe will clearly benefit from enhanced understanding between Central Banks. Said monetary policy has inevitably created destabilising spill-over and divergent monetary policy can create uncertainty about future policy intentions, this can lead to higher FX volatility and risk premia.

On the other hand, the S&P announced that it has cut the UK’s sovereign credit rating to AA, from previous from AAA. According to S&P, the outcome of the UK’s EU referendum will lead to less predictable, stable, and effective policy framework in the UK.

The S&P, an American financial services company also added that they have reassessed their view of the UK's institutional assessment and now no longer consider it strength in their assessment of the rating.

Similarly, rival agency Fitch lowered UK’s sovereign credit rating from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short-term.

Germany import price index May rose +0.9% m/m, higher than the market consensus of +0.6 percent m/m, from down -0.1 percent in April. On annual basis, it improved -5.5 percent y/y (expectations was for -5.8 percent y/y) as compared to previous -6.6 percent.

The German stock index DAX Index rose 2.28 percent at 9,478 by 09:40 GMT.