By Marc Jones
LONDON (Reuters) - Europe's benchmark government bond, the 10-year German Bund, had a zero yield firmly in its sights on Friday as worries about a potential British exit from the EU and weakened U.S. rate hike expectations extended the week's global bond rally.
Wall Street was expected to see a subdued restart with the momentum that had appeared to be taking the S&P 500 back to all-time highs earlier in the week sapped all of a sudden as Europe fell almost 2 percent, its biggest drop in a month.
Investors sought refuge in safe-haven assets amid festering concerns over the June 23 Brexit referendum and as oil took a tumbled at the end of what was set to be its ninth week of gains in the last ten.
It was bond markets though that demanded the attention as Germany's 10-year Bund yield inched to a new record of 0.022 percent to leave zero looming large.
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"It is the combination of the renewed Brexit concerns and last week's weak payrolls that have reduced Fed (rate hike) expectations," said UniCredit strategist Luca Cazzulani in Milan.
"The chance of seeing a print below zero is clearly material at this point... ahead of the UK referendum it is very unlikely that investors will want to change their positions much."
Ten-year yields in Japan and the UK were also stuck at record lows, 30-year bonds have seen big yield falls, while U.S. Treasury yields hit their lowest level in more than three months on Thursday.
More than $10 trillion of government debt globally now has negative yields meaning that investors pay rather than get paid to hold them. The ECB has added to the mix this week by starting to buy corporate bonds
"In general there is a big risk sentiment in the market," said Rabobank strategist Philip Marey. "I think everybody has got the Brexit jitters and come to realise we don't really understand how it would work if there was a vote to leave."
GOING FOR GOLD
The retreat in risk sentiment is proving a boon for gold, which is hovering near a three-week high, and on track for a second straight weekly rise.
Spot gold pulled back 0.1 percent on Friday to $1,267 an ounce, after climbing as high as $1,271 overnight. It is up 1.7 percent for the week.
In the currency market, the decline in U.S. unemployment benefit claims on Thursday and weakness in other currencies supported the dollar index, which tracks the greenback against a basket of six peers. The index advanced 0.3 percent, extending gains for the week to 0.2 percent.
The Swiss franc has gained 1.6 percent over the past five days, its biggest five-day gain since March 2015, and hit an eight-week high of 1.0879 franc per euro on Friday.
The low-yielding yen, which tends to be bought back when risk appetite suffers, stood at 106.83 per dollar, clinging near five-week highs of 106.26 set on Thursday, but remains down 0.5 percent for the week.
The euro eased as low as $1.1295 from a four-week high of $1.1416 set on Thursday, but is poised for a weekly decline of 0.6 percent.
The British pound dropped 0.2 percent to $1.4400, having slipped from this week's high of $1.4664 touched on Tuesday, and heading for a drop of 0.5 percent this week.
Although it has stayed 4.5 percent above its seven-year low set in late February, investors are actively seeking protection against a slide in the event of Brexit.
The cost of hedging against swings in sterling's exchange rate over the next month soared, with sterling's one-month implied volatility hitting its highest in more than seven years.
Oil prices also stepped back after notching another 2016 high.
Still, persistent threats by militants against Nigeria's oil industry and fear of more security incidents that could hit supply limited losses in crude.
Global benchmark Brent crude futures slipped 1.2 percent to $51.30 per barrel, after having risen to as high as $52.86 on Thursday, and looks set to record a 4 percent gain for the week.
U.S. crude also slid back below $50 to $49.92 but a barrel, poised to end the week around 3 percent higher.
Russia, one of the big world oil producers, cut its interest rates as expected. Its dollar-priced stocks were down 2 percent on the day but up almost four percent on the week and set to make eastern Europe the world's top performing region.
(Reporting by Marc Jones; Editing by Dominic Evans)
