UPDATE 2-German bonds catch safety bid, yields tumble to March low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds new quote)
MILAN, July 19 (Reuters) – German bond yields tumbled on Monday to the lowest since late-March as concerns over the economic impact of surging Delta coronavirus cases drove investors to stampede into safe-haven assets.
Countries worldwide are extending or re-introducing activity curbs in response to the rising infections. In Britain, which bucked the trend by dropping all activity curbs from Monday, Prime Minister Boris Johnson and finance minister Rishi Sunak were forced into self-isolation after the country’s health minister tested positive with the virus.
As stock markets tumbled and U.S. Treasury borrowing costs plumbed February lows below 1.24%, German bonds rallied, pushing 10-year yields down three basis points (bps) to -0.38%, just off 4-1/2-month lows.
Euro zone debt markets are looking ahead to this week’s meeting of the European Central Bank where policymakers could face off over their new policy path and how much more stimulus, mainly in bond purchases, will be needed.
The bank’s new strategy, unveiled earlier this month, may require it to extend or boost asset purchases to meet its new 2% inflation goal.
“Investors are waiting for answers from the ECB, and most of them expect the central bank to stick with its expansionary stance,” said Daniel Lenz, bond strategist at DZ Bank, referring to what triggered today’s fall in yields.
“An increasing number of coronavirus infections due the Delta variant are also weighing on bond prices,” he added.
Statements from ECB president Christine Lagarde imply the bank may not immediately end its PEPP emergency stimulus programme when it expires in March 2022.
Most analysts don’t expect many changes at Thursday’s meeting but Deutsche Bank economists predicted “some changes to forward guidance and communications around the new average inflation targeting unveiled earlier this month”.
Meanwhile, Germany’s 10-year real yield – the borrowing cost after stripping out inflation effects – fell 0.5 bps , having earlier set its lowest since August 2019 at -1.686%, according to Refinitiv data
Yields on an European Union bond issued in June were down 1.5 bps, hitting an all-time low at -0.119%.
Italy’s bonds – which would underperform debt from “core” Europe if the ECB reduces the flexibility of its purchases when the PEPP is over – came under pressure, with the 10-year bond yield rising 2 bps to 0.72%, after briefly hitting a fresh low since April at 0.695%.
“(Euro zone) spreads will … be sensitive to any updates (by the ECB) on asset purchases as net supply looms large in Q1 (2022),” analysts at Citi said.
Source: Read Full Article