German bond yields slip as rising virus cases cast shadow on promising data

German government bond yields edged lower on Thursday, after their biggest drop in five months in September, as equities were choppy amid worries about rising coronavirus cases across Europe.

German government bond yields edged lower on Thursday, after their biggest drop in five months in September, as equities were choppy amid worries about rising coronavirus cases across Europe. Optimism from an in-line manufacturing survey data did not last long as the second-wave of COVID-19 infections raised worries about the sustainability of the economic recovery.

The recovery in euro zone manufacturing activity gathered pace last month, but it was largely driven by powerhouse Germany and rising coronavirus cases across the region may yet reverse the upturn, a survey showed. "The PMI data was slightly optimistic, but more worrying is the rise in COVID-19 cases which should cap any big rise in bond yields," said Christian Lenk, a strategist at DZ Bank.

German 10-year government bond yields rose to as much as -0.497% before falling back to -0.53% at 1535 GMT. Still, it wasn't a typical rush for safety session as the yields in riskier peripheral debt from countries such as Portugal and Italy were softer across the board.

That tightened the gap between Italian and German 10-year bonds to 136 basis points (bps), just shy of a February low of 135 bps touched on Tuesday. Italian Economy Minister Roberto Gualtieri said on Thursday the government was targeting a 2021 debt-to-GDP ratio of 155.8%, down from the 158.0% goal for 2020.

Renewed concerns about the economic impact of rising coronavirus cases in Europe, weak inflation, and U.S. election uncertainty are likely to keep demand for fixed income assets intact. A resurgence in European COVID-19 cases has meant some restrictions have now been reimposed and a recent Reuters poll of economists said growth and inflation surprises are more likely to be negative than positive in the coming year.

The overnight newsflow was mixed as U.S President Trump signed a stopgap funding bill to keep the government running while officials have yet to agree on providing further COVID-19 stimulus. Elsewhere, a key euro zone money market rate dropped to a record low after a higher-than-expected take-up of cheap loans from the European Central Bank sharply boosted liquidity in the banking sector.

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