Bund yields touch lowest in almost 2 months on safety bid after U.S. debate

Data on Tuesday showed September's harmonised German consumer prices fell 0.4%, not a good sign for the "flash" estimate of inflation in the euro area in September due later this week. A key gauge of long-term inflation expectations in the euro area on Wednesday hovered close to its lowest levels since July at around 1.1373%.

Germany's 10-year bond yield touched its lowest level in almost two months on Wednesday, after an acrimonious first U.S. presidential debate made investors cautious globally and underpinned demand for safe-haven assets. Comments from a number of European Central Bank officials including President Christine Lagarde, and inflation data from Italy and France also supported regional debt markets.

Lagarde set the scene for changing the ECB's strategy to align it with that of the Federal Reserve, possibly including a commitment to let inflation overshoot after it has been low for too long. In her first update on the ECB's ongoing review of its strategy, Lagarde also opened the door to giving the central bank less time to achieve its elusive near-2% inflation goal.

"In our view she is making a very clear case for a symmetric goal of 2%," said Nick Kounis, head of financial markets research at ABN AMRO. The 10-year Bund yield touched -0.55%, its lowest since early August. The benchmark yield is down almost 15 basis points in September, on track for its biggest monthly drop since February.

Data showed Italy's EU-harmonised consumer prices rose a preliminary 1.0% month-on-month in September and declined 0.9% from the year earlier, pointing to deepening deflation. French consumer prices were flat in September over a twelve-month period. Data on Tuesday showed September's harmonised German consumer prices fell 0.4%, not a good sign for the "flash" estimate of inflation in the euro area in September due later this week.

A key gauge of long-term inflation expectations in the euro area on Wednesday hovered close to its lowest levels since July at around 1.1373%. Renewed concerns about the economic impact of rising coronavirus cases in Europe, weak inflation, and U.S. election uncertainty have boosted demand for fixed income assets in recent weeks.

"Financial markets were generally a touch weaker as fears of a contested election outcome grew," said Chris Bailey, European strategist at Raymond James, referring to Tuesday's debate between U.S. President Donald Trump and Democrat rival Joe Biden. Most euro zone bond yields were steady, although Italian yields were a touch higher. Italy's 10-year yield rose 2 basis points to 0.86%.

Analysts said a media report on Tuesday citing the possibility of a delay to the EU Recovery fund could explain the slight weakness in peripheral bond markets. ECB Chief Economist Philip Lane is scheduled to speak later on Wednesday.

 

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