Euro zone bond yields rise; focus on coronavirus infections, supply

Eurozone bond yields edged higher on Tuesday as investors kept a wary eye on climbing coronavirus infection rates in China and other countries that have eased their lockdown restrictions. The Chinese city of Wuhan, where the coronavirus pandemic originated, saw its first new cases since its lockdown was lifted, adding to concern easing restrictions may cause a rise in new cases.

"... That would indicate there might need to reverse some of the easing measures and of course that would be more restrictive regarding economic activity," said DZ Bank rates strategist Andy Cossor. German 10-year bond yields rose 3 basis points to -0.49%. Most other yields also rose.

DZ Bank's Cossor cited a break to a trendline on Bund futures prices, with the future quoted below recent trends. Technical traders could see this as a negative signal for bond prices, putting selling pressure on Bunds, he said. Italian 10-year bond yields were down 1 basis point to 1.88%, after rising 10 bps during the previous session.

Eurozone inflation expectations fell to a nearly seven-week low below 0.87%, according to the five-year, five-year forward reading, having edged lower over the last week. With a light data calendar in the eurozone, the focus is on the primary market. Germany sold 3.256 billion euros of new seven-year bonds, while the Netherlands raised 2.2 billion euros in a re-opening of a 10-year bond.

The focus was also on the European Central Bank's asset purchases after data on Monday showed it had conducted its largest weekly purchases on record. BlackRock said it was "reviewing" its overweight position on southern eurozone debt, citing the recent German constitutional court ruling that the ECB must justify its PSPP bond purchases within three months or risk losing Germany as a participant.

The world's largest asset manager said the decision threatens to fuel fragmentation in the euro area in the long run. ECB executive board member Isabel Schnabel said the central bank will continue to act in the manner it sees fit, MNI News reported.

Talk of the potential for its Pandemic Emergency Purchase Programme to be increased show the ECB intends to ignore a decision on another bond-buying scheme, the Public Sector Purchase Programme, by the German Constitutional Court last week, Mizuho analysts told clients. German Chancellor Angela Merkel said on Monday that the situation can be resolved if the ECB explains the plan.