Euro zone bond yields dip as concern grows over second COVID wave

High-grade euro zone government bond yields fell across the board on Thursday on bets that the European Central Bank will keep the stimulus taps flowing as worries grow over the economic impact of a second wave of COVID-19 infections. With a number of countries in Europe - including Britain and Spain - taking fresh measures to combat a renewed surge in coronavirus cases, policymakers around the world are expected to respond in kind.

High-grade euro zone government bond yields fell across the board on Thursday on bets that the European Central Bank will keep the stimulus taps flowing as worries grow over the economic impact of a second wave of COVID-19 infections.

With a number of countries in Europe - including Britain and Spain - taking fresh measures to combat a renewed surge in coronavirus cases, policymakers around the world are expected to respond in kind. In the United States, Federal Reserve officials have doubled down on efforts to convince investors they will keep monetary policy easy for years to allow unemployment to fall, emphasising that interest rates will stay near zero.

With a survey showing on Wednesday that the German services sector slipped back into contraction, bets are that European policymakers will similarly maintain a dovish stance. ECB Chief Economist Philip Lane was due to respond to questions on Twitter later on Thursday. "There's clearly been a ramping up of dovish talk by some ECB speakers - not everyone, but enough to generate some hope for more stimulus," said ING rates strategist Antoine Bouvet.

"There's also some risk aversion at play, with the U.S. election coming up on top of the various lockdown measures being taken." That said, business morale in Germany and France improved for the fifth month in a row in September, boosting hopes that the euro zone's two biggest economies had enjoyed a solid recovery from the coronavirus shock.

German 10-year bond yields , the benchmark for the bloc, dropped two basis points to -0.523%, not far from a 1-1/2 month low of -0.539% hit on Monday. The country's longer-dated 30-year debt dropped further into negative territory, and was down 2.5 bps at -0.08%. The move was matched by other high-grade bonds, with Dutch and French borrowing costs also dropping between 1-2 bps. ,

Market expectations of long-term eurozone inflation dropped to its lowest level in two months at 1.1482%, well below the ECB's target of just below 2%. Euro zone banks borrowed 174.5 billion euros from the European Central Bank in the latest round of its ultra-cheap, three-year Targeted Longer-Term Refinancing Operation (TLTRO), the ECB said on Thursday.

Also on Thursday, Italy sold 750 million euros of 10-year inflation-linked bonds on strong demand.