Southern European bond yields rise; Euribor rates hit record lows

"Tighter covid-related restrictions across Europe, this time in Spain and the UK, remain the main theme," ING analysts said in a note to clients. Most analysts believe that the ECB will extend the pandemic emergency programme (PEPP) in December, with some saying that the targeted liquidity operations (TLTROs) should also be on the agenda.

Southern European government bond yields rose on Friday as Spain joined other countries on the continent in imposing tougher rules to curb the spread of the coronavirus. Spain will be under a state of emergency until early May, giving regions legal backing to decide curfews and restrict travel to try and contain rampant COVID-19 contagion. [nL8N2HK7AA

On Thursday, the European Central Bank clearly signalled it will provide more stimulus at its next meeting to contain the growing fallout from a second wave of infections, pushing peripheral European bond yields to their lowest in 10 days. Three- and six-month Euribor rates hit a record low of -0.523% and -0.521% respectively on Friday on the expectation that the ECB's lending target will be easier to hit, said Lyn Graham-Taylor, fixed income strategist at Rabobank.

"There's expectation that the ECB will extend the situation where you're able to effectively borrow money at an interest rate of -1%...because borrowing using targeted liquidity operations (TLTROs) that's the lowest possible rate you can pay as a bank," Graham-Taylor said. On Friday, however, new coronavirus-related pessimism pushed yields higher again.

Italian 10-year BTP yields were last trading up 1 basis point at 0.70%, with other peripheral yields up by a similar amount, including Greek bonds which are rated junk and only eligible for ECB emergency bond buying. "Tighter covid-related restrictions across Europe, this time in Spain and the UK, remain the main theme," ING analysts said in a note to clients.

Most analysts believe that the ECB will extend the pandemic emergency programme (PEPP) in December, with some saying that the targeted liquidity operations (TLTROs) should also be on the agenda. Few expect a rate cut. Money markets project a 25% probability the ECB will lower the benchmark interest rate to -0.60% from the current -0.50%. "Even with the Covid-19 situation worsening, this leaves room for spreads to tighten and rates to grind lower," ING analysts said.

Benchmark German 10-year Bund yields were also up 1 bps at -0.62%. German retail sales fell more than expected in September, data showed on Friday, dampening hopes that household spending would helped to drive a recovery in Europe's largest economy.

Flash inflation and euro zone third-quarter gross domestic product data were also released, but failed to have an impact on rates as it didn't reflect the latest Covid19 restrictions across the European continent, Rabobank's Graham-Taylor said. Inflation remained stable, but GDP growth beat analysts' expectations.

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