Euro zone bond yields fall, focus on bond scarcity, coronavirus

"Bunds should remain better supported as lockdown fears highlight growth risks while the collateral scarcity and (asset swap) widening extend," Commerzbank rates strategists Rainer Guntermann and Hauke Siemssen said. By 0810 GMT, Germany's 10-year yield, the benchmark for the bloc, was down 2 basis points to -0.28%.

Euro zone bond yields fell on Monday as focus remained on a supply shortage going into year end that has kept a lid on the bloc's borrowing costs. Bond yields fell across markets, with U.S. Treasury yields also continuing to fall after data showed consumer sentiment plunged to a 10-year low on Friday.

Analysts continued to focus on bond scarcity in the euro area going into year end, as issuance falls while demand for safe assets to use as collateral rises. That has been seen as keeping bond yields contained while euro area swaps yields have risen relative to government bonds. That helped bond yields, even shorter-dated, fall on Friday even as money markets priced in two full rate hikes from the European Central Bank by the end of 2022.

The bloc's government bonds, whose yields move inversely with their prices, were also likely supported by member states moving to implement lockdown measures to curb the spread of the coronavirus, with Germany the latest country to plan tighter curbs. "Bunds should remain better supported as lockdown fears highlight growth risks while the collateral scarcity and (asset swap) widening extend," Commerzbank rates strategists Rainer Guntermann and Hauke Siemssen said.

By 0810 GMT, Germany's 10-year yield, the benchmark for the bloc, was down 2 basis points to -0.28%. Italian bonds, which underperformed on Friday, outperformed and the 10-year yield was down 4 bps to 0.92%. That pushed the closely watched spread they pay over German peers down to 119 bps.

The market should see around 16 billion euros of issuance this week, but net supply will be positive with few coupon payments and redemptions to offset the issuance, Commerzbank analysts said. Focus is also on European Central Bank President Christine Lagarde, who will speak at a European Parliament hearing at 1000 GMT.

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