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UPDATE 1-Euro zone yields fall as U.S.-German spread nears widest since March

Thu, 8th Oct 2020 13:29

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Updates prices, adds comments)

By Elizabeth Howcroft

LONDON, Oct 8 (Reuters) - European government bond yields
fell on Thursday, as rising coronavirus cases in Europe and
longer-term uncertainty kept sentiment subdued, even as equity
markets were lifted by renewed hopes for U.S. fiscal stimulus.

Germany's benchmark Bund yield was down 2 basis points at
-0.513%, while Portugal's 10-year yield hit its lowest since
March at 0.203%. Italy's 10-year yield fell 3 bps,
hitting its lowest since September 2019 at 0.761%.

Euorpean Central Bank (ECB) vice-president Luis de Guindos,
commenting on "subdued" inflation expectations in the euro zone,
said that the central bank has to use all the tools at its
disposal.

Minutes from the ECB's September meeting showed that
policymakers argued for a "free hand" to fight the economic
damage caused by the coronavirus pandemic.

Daniel Lenz, rates strategist at DZ Bank, said underlying
uncertainty in markets was keeping core yields down.

"ECB impact is so big that in general the spreads have a
continuous downward trend and yields remain on a very low
level," he said.

"I don’t see much movement for the German yield going higher
than -0.50%," he said, citing the U.S. presidential elections,
Brexit uncertainty and rising COVID-19 infections in Europe,
which have surged in countries including France, Germany and
Poland.

This followed renewed hopes on Wednesday for a U.S. fiscal
stimulus package which had driven euro zone yields higher, while
in the United States, Treasury prices fell and the yield curve
steepened.

The spread between German and U.S. 10-year yields was 129
bps, close to its widest since March.

"It is still closer to crisis levels than to more normal
levels, but the path that the spread is on is an auspicious one.
What we want to see here is a classic U.S. recovery that helps
to lift the likes of Europe in the same direction," ING rates
strategists said in a note to clients.

"The bond market is in the early phase of pricing in that
exact likelihood. But we still have some way to go."
(Reporting by Elizabeth Howcroft; Editing by Larry King and
Alexander Smith)

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