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UPDATE 2-German 10-year bond yields set for biggest weekly drop since June

Fri, 16th Oct 2020 10:57

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Recasts, updates prices)

By Yoruk Bahceli

AMSTERDAM, Oct 16 (Reuters) - Germany's 10-year bond yield
was set for its biggest weekly drop since June, but markets
stabilised on Friday near seven-month lows following Thursday's
flight from risk prompted by measures to curb coronavirus
infections in Europe.

Safe-haven German bond yields have fallen to their lowest
levels since mid-March, when the coronavirus first spread
globally. A rally that had pushed Italian bond yields to record
lows has also come to an end.

As markets stabilised on Friday, Germany's 10-year yield was
down 1 basis point to -0.62%.

U.S. President Donald Trump's willingness to raise his offer
for a coronavirus relief package to get a deal with the House of
Representatives helped risk sentiment during U.S. trading on
Thursday.

Still, German 10-year yields were set for their biggest
weekly drop since the week ending June 12, down 9 basis points
this week.

"The excess liquidity continues to support the bond market
for the rest of the year, and with the possibility of a
break-down in the Brexit negotiation, rising infections etc.,
then the safe-haven buying could continue short-term," Jens
Peter Sorensen, chief analyst at Danske Bank, told clients.

The sell-off in Southern European bonds led by Italy also
came to a halt on Friday, with Italy's 10-year yield down 1
basis point to 0.69%.

The risk premium Italy pays for 10-year debt on top of
Germany was at 130 basis points, down from two-week highs at 136
basis points hit on Thursday.

Analysts expect Thursday's sell-off to be temporary, noting
support from the European Central Bank's emergency pandemic
bond-buying programme, and investors expecting more stimulus
from the ECB by the end of the year, of which Italy would be a
leading beneficiary.

"We do not expect yesterday's widening to gain momentum,
precisely because of these technical supportive factors,"
UniCredit analysts said.

A number of ECB governing council members spoke on Friday.
Bank of Italy Governor Ignazio Visco said it was important to
avoid early withdrawals of policy because pre-COVID conditions
won't return. Finland's Olli Rehn said the ECB should follow the
U.S. Federal Reserve in putting more emphasis on welfare, even
if it means inflation exceeds its target temporarily.

Ireland's central bank governor Gabriel Makhlouf said there
has been no change to the macroeconomic environment since the
ECB's last meeting.
(Reporting by Yoruk Bahceli; editing by William Maclean, Larry
King, Peter Graff)

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