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UPDATE 2-Euro zone bond yields dip as concern grows over second COVID wave

Thu, 24th Sep 2020 12:29

* Fed officials say will keep rates lower for longer

* German yields dip towards 1-1/2 month low

* Long term euro zone inflation expectations at 2-mnth low

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

By Abhinav Ramnarayan

LONDON, Sept 24 (Reuters) - High-grade euro zone government
bond yields fell across the board on Thursday on bets that the
European Central Bank will keep the stimulus taps flowing as
worries grow over the economic impact of a second wave of
COVID-19 infections.

With a number of countries in Europe -- including Britain
and Spain -- taking fresh measures to combat a renewed surge in
coronavirus cases, policymakers around the world are expected to
respond in kind.

In the United States, Federal Reserve officials have doubled
down on efforts to convince investors they will keep monetary
policy easy for years to allow unemployment to fall, emphasising
that interest rates will stay near zero.

With a survey showing on Wednesday that the German services
sector slipped back into contraction, bets are that European
policymakers will similarly maintain a dovish stance.

Containing the coronavirus must be a priority for
policymakers as a surge in infections would damage consumer and
investor confidence in the economy, the European Central Bank's
chief economist Philip Lane said on Thursday.

The baseline scenario in the bank's staff projections is
that a medical solution is found over the course of the next
year, he added.

"There's clearly been a ramping up of dovish talk by some
ECB speakers -- not everyone, but enough to generate some hope
for more stimulus," said ING rates strategist Antoine Bouvet.

"There's also some risk aversion at play, with the U.S.
election coming up on top of the various lockdown measures being
taken."

That said, business morale in Germany and France improved
for the fifth month in a row in September, boosting hopes that
the euro zone's two biggest economies had enjoyed a solid
recovery from the coronavirus shock.

Germany's 10-year bond yield , the benchmark for
the bloc, was down 1 basis point to -0.51% in late trade, not
far from a 1-1/2 month low of -0.539% hit on Monday.

Market expectations of long-term euro zone inflation
dropped to its lowest level in two months at
1.1482%, well below the ECB's target of just below 2%.

Focus was also on the European Central Bank's latest round
of ultra-cheap, three-year Targeted Longer-Term Refinancing
Operation (TLTRO) loans, which have flooded banks with abundant
liquidity, pushing money market rates to record lows.

Euro zone banks borrowed 174.5 billion euros at the latest
allotment, the ECB said on Thursday, above what
many analysts expected.

Also on Thursday, Italy sold 750 million euros of 10-year
inflation-linked bonds on strong demand.
(Reporting by Abhinav Ramnarayan; Additional reporting by Yoruk
Bahceli; Editing by Catherine Evans)

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