Benchmark German yield holds near seven-month lows; spreads widen

Long-term euro zone inflation expectations were also muted, with a key gauge - the five-year, five-year forward swap - near a three-month low at 1.1213%. The spread between core and peripheral bond yields widened, with Spanish, Italian and Portuguese 10-year yields up 2-5 bps on the day.

Core euro zone government bond yields held near seven-month lows on Monday, while riskier Italian yields bucked recent trends by rising as much as 6 basis points on the day. With a second wave of COVID-19 infections sweeping Europe and new restrictions introduced by a number of governments, investors are looking for clues on monetary policy easing before the end of the year.

ECB President Christine Lagarde said on Monday that the central bank will maintain an accommodative policy in response to the coronavirus crisis. High-grade euro zone yields were little changed, having had one of the biggest weekly declines since June last week.

Germany's benchmark 10-year government bond yields were at -0.62% on Monday, more than 10 bps below the current ECB deposit rate, suggesting investors are expecting further easing. Long-term euro zone inflation expectations were also muted, with a key gauge - the five-year, five-year forward swap - near a three-month low at 1.1213%.

The spread between core and peripheral bond yields widened, with Spanish, Italian and Portuguese 10-year yields up 2-5 bps on the day. Italy's 10-year yield was up 5 bps at 0.708% and the spread between Germany and Italy's 10-year yields was up 6 bps.

"It's a consolidation move after a long rally, but there's a tension between the monetary policy and the fact that you can see the real economy is deteriorating," said Mizuho's head of rates, Peter Chatwell. "The second wave of COVID-19 is having a greater impact on the Spanish economy and perhaps the Italian economy, so we have some imbalances coming back to the fore in the coming weeks," he said.

October's purchasing managers' index data due later in the week should give an indication of the impact of the second wave of infections, he said. Policymaker Robert Holzmann said he saw no need for further monetary stimulus at present but left the door open for more stimulus if the pandemic got worse.

The European Union hired a syndicate of banks on Monday to sell the first bonds that will fund its SURE unemployment scheme, according to lead manager memos seen by Reuters. The EU said in October that it will finance the whole SURE scheme of up to 100 billion euros via "social" bonds.

In terms of supply, a highly anticipated round of bond issuance from the European Union could appear as early as this week, analysts believe.

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