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UPDATE 2-German yields fall to lowest since May, Portugal sells bonds with record low yield

Wed, 14th Oct 2020 12:45

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Updates prices, adds ECB's Mersch quotes)

By Yoruk Bahceli

AMSTERDAM, Oct 14 (Reuters) - Germany's 10-year bond yield fell to its
lowest since May and Portugal sold bonds at a record-low yield as threats to the
bloc's economy from a second wave of the coronavirus and expectations of
stimulus from the European Central Bank continued to support government paper on

Anticipated support from the ECB has particularly benefited debt from
lower-rated, Southern European countries, which offer a yield pick-up on the
likes of Germany and would benefit the most from the stimulus.

Germany will recover more slowly from the coronavirus pandemic than
originally predicted, Germany's leading economic research institutes forecast on
Wednesday while the euro zone industrial production reading for
August slowed sharply as expected.

Portugal raised 1 billion euros from an auction, which included eight-year
bonds pricing at a negative yield, the first time it has achieved a sub-zero
yield on a maturity longer than six years.

Portugal and Spain's 10-year yields are also heading closer to negative
territory, currently both at around 0.14% .

"It is part of a general trend of dropping yields in the periphery and this
is on the back of two things... the prospect of monetary and fiscal support from
the ECB and EU respectively," said Antoine Bouvet, senior rates strategist at

"Italy, Greece, Portugal, they all stand to benefit a lot from ECB purchases
and EU fiscal support when it materializes."

But analysts are mindful of potential risks to Southern European debt as
uncertainty remains around the ratification of the European Union's 750 billion
euro recovery fund.
"The market seems poised to look through adverse EU headlines, which may pick
up ahead of tomorrow's summit," Commerzbank's head of rates and credit research
Christoph Rieger told clients.

"The haggling and implementation risks look set to prevail for a while."

Elsewhere, safe-haven German 10-year bond yields fell to their lowest since
mid-May at -0.58%, down 2 basis points on the day.

Germany saw strong demand for its re-opening of a 30-year bond, which raised
897 million euros at a bid-cover ratio of 2.4-times.

Italian 10-year bond yields fell to a new record low at 0.634%

Focus was also on ECB speakers on Wednesday, with President Christine
Lagarde saying it will review a key rule forcing it to buy corporate bonds in
proportion of their outstanding amounts in light of the market's "failure" to
reflect risks related to climate change.

Statements from ECB outgoing board member Yves Mersch, who is associated
with more hawkish views, didn't trigger much action on bonds.

Mersch said he had yet to be convinced that the ECB, currently in the middle
of rewriting its inflation target and how to achieve it, needed a new strategy
at all.
(Reporting by Yoruk Bahceli, additional reporting by Andrei Khalip in Lisbon;
editing by Alexandra Hudson)

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