Eurozone bonds sell off as stocks hit five-month peak

European government debt sold off on Monday as stock markets hit new highs, boosting sentiment across the investment world and lessening demand for safer assets. World equity benchmarks hit a five-month peak as investors turned to second-quarter earnings for signs that corporate profits will recover from the economic toll of the COVID-19 pandemic.

"It's been a good day for equities in general and a good day for risk," said Rabobank strategist Lyn Graham-Taylor, adding: "I think (moves) definitely will be exaggerated by quiet markets." The 10-year German Bund yield was set for its biggest daily jump since July 1, as it rose around 6 basis points (bps) to -0.41%, a considerable turnaround from Friday when it hit a 6-1/2 week low of -0.49% in intraday trading.

The 30-year Bund yield also saw its biggest daily jump in over a month, up 7 bps at 0.016%. Riskier Spanish, Italian and Portuguese government bond yields also ticked up, but to a lesser extent. Italy's 10-year yield touched its highest in over a week in early trading, but had returned to near Friday's levels by 1435 GMT, at 1.29% .

Rabobank's Graham-Taylor expects the EU's recovery fund to be the main driver of market moves this week. Investors hope the EU 27 will make progress in agreeing a 750 billion euro ($849 billion) COVID-19 recovery fund. Markets have moved in support of the fund, most of which has been proposed as grants to the worst-hit states such as Italy, sending that country's debt rallying in recent weeks.

But opposition looms from states that oppose grants, such as the Netherlands and Austria. European Council President Charles Michel offered a proposal on Friday to make the fund more palatable. The hawkish states welcomed the move, but said more work was needed. The Netherlands said it would seek guarantees on budget reforms this week. Market focus is also on the European Central Bank (ECB), which meets on Thursday, when no change is expected to the bank's monetary policy. Analysts will be watching the ECB's weekly bond-purchase data later on Monday for a further sense of a slowdown in the bank's bond-buying.

The slowdown has been a potential cause of concern, analysts said, as some ECB bond members suggested the emergency bond purchase "envelope" might not be used in full, while others saw the slowdown as an early start to the sluggish summer period. ($1 = 0.8836 euros)

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