Euro zone yields dip as Omicron hangs over central bank meetings

"At the same time, headline inflation has continued to accelerate." Saying that the ECB has a difficult balance to strike, he thought it unlikely that PEPP will get an extension, given comments by ECB chief Christine Lagarde and others, though a postponement of the decision until February is possible. Germany's 10-year government bond yield, the benchmark for the bloc, was down over 2 basis points at -0.373% in afternoon trading, heading towards last week's 3-1/2-month low of -0.406%.

Euro zone government bond yields edged lower at the start of a week in which the European Central Bank, the U.S. Federal Reserve and the Bank of England are all due to meet and possibly signal a tightening of policy in the face of strong inflation. But growing Omicron infections in Europe and the United States complicate matters and are likely to trigger some caution as policymakers either side of the Atlantic prepare to signal or hint at an end to pandemic-era measures.

The Fed is likely to lead the pack with a tapering of bond purchases earlier than previously expected, while the ECB could provide more detail on how it will unwind its Pandemic Emergency Purchase Programme (PEPP), due to end in March. A Reuters poll of ECB-watchers found the ECB would halve the amount of assets it buys each month from April.

"The current fourth wave of the pandemic and the new Omicron variant will add further downward pressure to the euro zone economy," ING economist Carsten Brzeski said. "At the same time, headline inflation has continued to accelerate." Saying that the ECB has a difficult balance to strike, he thought it unlikely that PEPP will get an extension, given comments by ECB chief Christine Lagarde and others, though a postponement of the decision until February is possible.

Germany's 10-year government bond yield, the benchmark for the bloc, was down over 2 basis points at -0.373% in afternoon trading, heading towards last week's 3-1/2-month low of -0.406%. Other high-grade euro zone government bond yields were also marginally down on the day.

On Wall Street, the yield on 10-year Treasury notes fell over 4 basis points to 1.4411%. Investors have retreated in droves to the safety of government bonds since news of the Omicron variant of COVID-19 emerged, pushing yields to their lowest levels in months.

German borrowing costs are now a good 25 basis points (bps) below their October highs. In a move which is likely to influence the monetary policy of the bloc, Germany's new finance minister Christian Lindner said an announcement about who will succeed outgoing Bundesbank President Jens Weidmann would come very soon.

Weidmann will step down five years ahead of time on Dec. 31 after a decade of largely fruitless opposition to the European Central Bank's ultra-easy monetary policies.