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Supply out of the way, euro zone bond yields head back down

"It feels to me as if there is some relief after the end of this week's heavy supply slate for EGBs (European government bonds) and Italy and Spain are outperforming the lot," said Antoine Bouvet, senior rates strategist at ING. Renewed optimism about the euro area following last month's agreement on a 750 billion euro ($890 billion) European Union recovery fund has boosted sentiment towards peripheral bond markets, tightening the yield premium that investors demand for holding their bonds over those of benchmark Germany.

Reuters | Madrid | Updated: 06-08-2020 15:50 IST | Created: 06-08-2020 15:44 IST
Supply out of the way, euro zone bond yields head back down
Representative Image Image Credit: Flickr

Government bond yields across the euro area fell on Thursday after markets digested new bond sales from France and Spain, with Italy's 10-year bond yield moving back to the psychologically important 1% level. Between them, France and Spain sold roughly 14 billion euros of bonds. That supply had contributed to some upward pressure on bond yields.

But with the new issuance absorbed, investors appeared to return to a favoured summer trade of buying peripheral bonds. Ten-year bond yields across southern Europe were down 3-4 basis points each. Spain's 10-year bond yield fell as low as 0.278%, its lowest since March.

Italy's 10-year bond yield fell to 1.004%, nearing multi-month lows. "It feels to me as if there is some relief after the end of this week's heavy supply slate for EGBs (European government bonds) and Italy and Spain are outperforming the lot," said Antoine Bouvet, senior rates strategist at ING.

Renewed optimism about the euro area following last month's agreement on a 750 billion euro ($890 billion) European Union recovery fund has boosted sentiment towards peripheral bond markets, tightening the yield premium that investors demand for holding their bonds over those of benchmark Germany. But yields on higher-rated bonds such as German ones also fell on Thursday, perhaps reflecting some demand for safe-haven assets in the face of the continued uncertainty sparked by the coronavirus outbreak.

Germany's 10-year Bund yield was last down 2 basis points on the day at -0.52%, having briefly touched a one-week high in early trade. Having fallen to within striking distance of 2-1/2-month lows on Tuesday, yields in the euro zone benchmark bond issuer have drifted back-up, rising almost 5 basis points on Wednesday.

"We tend to think the market will be looking at sell offs like that of yesterday as buying opportunities, rather than a more bearish signal for now," said Peter McCallum, rates strategist at Mizuho in London. "The environment remains constructive for European government bond spreads." Elsewhere, Britain's 10-year gilt yield briefly rose to 0.15% - its highest in almost two weeks - after the Bank of England left its monetary policy unchanged on Thursday.

The BoE said it made no changes to its key interest rate, standing at just 0.1%, or its huge bond-buying programme. It said the economy would not regain its size as of the end of 2019 until the end of next year. ($1 = 0.8427 euros)


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