German yields stable as traders weigh ECB stimulus and new COVID-19 wave

The German 10-year Bund yield held steady around the one-month low it touched last week as traders debated whether the stimulus from the European Central Bank was adequate protection against a second wave of coronavirus infections.

The German 10-year Bund yield held steady around the one-month low it touched last week as traders debated whether the stimulus from the European Central Bank was adequate protection against the second wave of coronavirus infections. Yields were unchanged even after eurozone inflation rose in June from a four-year low in May, defying expectations it would be stable, as the negative impact of low energy prices decreased.

While the overall COVID-19 death rate has flattened, health experts have expressed concerns about record numbers of new cases in some countries, including the United States, India, and Brazil. Hopes have risen the ECB will settle its differences with Germany's constitutional court, which ruled last month the central bank must justify bond purchases under its stimulus plan or lose the Bundesbank as a participant.

The ECB has honored the principle of proportionality with its flagship stimulus program, German Finance Minister Olaf Scholz said in a letter to the president of Germany's lower house of parliament. "This should contribute to boosting the credibility of the ECB's QE (quantitative easing) response and serve to maintain its benefits," said ING analysts in a note to clients.

"As this debate is being settled, a new, more important one is about to take place is the set of measures enough to shield markets and the eurozone economy from the second wave of COVID infections?" they wrote, adding: "We are inclined to answer in the negative." Traders will be looking for pointers from ECB's Isabel Schnabel speech at 1300 GMT.

Lyn Graham-Taylor, the fixed income strategist at Rabobank, said it was very difficult to read markets because of the "overwhelming influence" of central banks, which is likely to continue. "A second wave is unavoidable and the measures we've taken so far to deal with the current wave only emphasized the longer-term concerns we have - the measures taken will promote inequality," she said.

"If anything, the huge increase in government debt will require central banks to keep yields low in order to keep it sustainable." Germany's 10-year bond yield, the benchmark for the eurozone, was steady at -0.47%, within sight of Friday's one-month low of -0.484%.

Italian 10-year BTP yields were 3.5 basis points lower at 1.33%, while the premium Italy pays for its debt was at 179 bps. Long-term eurozone inflation expectations were at 1.1035%, after hitting a near four-month high of 1.107% the day before, according to the five-year, five-year forward rate, a market gauge of long term expectations. This compares to 0.84% in mid-May and an all-time low of 0.7198% in March.