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UPDATE 2-Euro zone yields fall as risk-sentiment remains subdued

Thu, 8th Oct 2020 13:29

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Updates prices, adds Trump on rescue package, strategist
quote)

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, while equity
markets were lifted by expectations for more U.S. stimulus and
lower-for-longer rates.

Germany's benchmark Bund yield was down 3 basis points at
-0.522%, while Portugal's 10-year yield was at 0.207% after
hitting its lowest since March at 0.203%. Italy's
10-year yield fell 2 bps at 0.761%, after hitting its lowest
since September 2019 at 0.759%.

U.S. President Donald Trump saying there is a good chance to
reach a deal on a fresh stimulus package did not trigger much
action in European markets, while U.S. Treasuries pared their
gains.

"It could just simply be tactical, technical, a retracement
after quite some notable back-up in yields - certainly in the
U.S.," Richard McGuire, rates strategist at Rabobank said,
referring to Thursday's yields fall.

European 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 U.S. central bank has room to expand its balance sheet,
but what businesses and households really need is more
government grants and aid, Chicago Federal Reserve Bank
President Charles Evans said on Wednesday.

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, additional reporting by
Stefano Rebaudo; Editing by Lisa Shumaker)

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