German bond yields rise from two-month lows in busy week

Marc Chandler, chief strategist at Bannockburn Global Forex, said Europe appears to have been considerably more successful than the United States in controlling the virus, which can have knock-on effects on the economy with the eurozone purchasing manufacturing surveys in the last two months pointing to a stronger European recovery than the United States. Still, demand for safe-haven government debt is likely to remain strong this week thanks to data and the outlook for a new U.S. stimulus package.

German government bond yields drifted on Monday from more than two-month lows hit in the previous session as the market steadied after Friday's selloff in risky assets. With major currencies closeted in tight ranges, bonds took their cue from range-bound stocks and focused on broader trends such as the outperformance of European assets over U.S. markets.

Bond yields for peripheral European countries like Italy rose on Friday due to month-end rebalancing flows, but overall the European bond market looked robust in July after the European Union agreed a recovery fund. Italy's 10-year yield dropped 30 basis points in July to its lowest since early March, its biggest monthly fall since January.. Even safe-haven German government debt had a decent month.

Monday offered investors the opportunity to take profits, with Asian stock markets mixed and a data-filled week. Yields on benchmark German debt rose 1 basis point to -0.527%. It reached its lowest level since the end of May at -0.561%. "Temporary weakness in European government bonds and spreads may be seen in coming sessions on account of the magnitude of the strength we have seen already ... in any case, we would see such weakness as opportunities to buy the dip," Mizuho strategists said in a note.

The EU recovery fund and a surge in coronavirus infection cases in the United States have fuelled investor demand to buy the euro and European bonds over their U.S. counterparts. Marc Chandler, chief strategist at Bannockburn Global Forex, said Europe appears to have been considerably more successful than the United States in controlling the virus, which can have knock-on effects on the economy with the eurozone purchasing manufacturing surveys in the last two months pointing to a stronger European recovery than the United States.

Still, demand for safe-haven government debt is likely to remain strong this week thanks to data and the outlook for a new U.S. stimulus package. Investors were nervous at the lack of a new stimulus package in the United States with White House Chief of Staff Mark Meadows not optimistic on reaching agreement soon on a deal.

A Bank of England rate decision on Thursday and U.S. jobs data on Friday will also keep investors on the sidelines. Yields on benchmark Italian bonds were steady at 1.077%.

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