German Bund yield pulls back from 2-month highs, ECB comments help

LONDON: Germany's 10-year bond yield edged off two-month highs on Wednesday, as hopes for a COVID-19 vaccine gave way to the view that monetary stimulus to shore up a fragile economy would underpin bond markets moving forward.

The European Central Bank will mainly look at more emergency bond purchases and cheap loans for banks when it puts together its new stimulus package next month to help a pandemic-hit economy, ECB chief Christine Lagarde said.

Those comments boosted euro zone bond markets, which have taken a beating this week from the news that Pfizer's experimental COVID-19 vaccine is more than 90% effective based on initial trial results.

Germany's benchmark 10-year Bund yield was last down 2.5 basis points at -0.51%, down from a two-month high touched in early trade at -0.456%.

Analysts say this week's news on a COVID-19 vaccine is positive for risk sentiment and global growth prospects, but it does not change the near-term outlook for more policy stimulus from the ECB.

"Even though logistical issues remain, and there is uncertainty around the data, the fact that we now look likely to have (potentially multiple) successful vaccines - should be enough in of itself for markets to look forward to restriction removal," said Ross Hutchison, a rates fund manager at Aberdeen Standard Investments.

"However, my view is that both the damage done from the virus and restrictions, combined with the higher aggregate indebtedness will mean yields will need to remain historically low for the foreseeable future."

Yields in Italy, a big beneficiary of the ECB's bond-buying stimulus, led the move down in euro area bond yields. Ten-year Italian BTP yields were last down 4 bps on the day at 0.68% , and heading back towards record lows touched on Monday.

Trade in general was subdued as U.S. debt markets were closed for Veterans' Day.

Analysts say any room for further selling in euro zone bond markets was limited given the still weak inflation outlook.

"The scope for a further rise in yields is limited by a couple of factors. One is policy - we don't expect a central bank response to better growth conditions until inflation rises," said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.