German Bund yield dips to 1-1/2 week low, bonds underpinned by ECB outlook

LONDON: Germany's 10-year Bund yield fell to its lowest level since Pfizer announced its COVID-19 vaccine update a week-and-a-half ago as concern that economic activity will remain depressed long after a vaccine is rolled out supported safe-haven bonds.

Analysts gave three main reasons for the recovery in bond markets in recent days - a surge in coronavirus cases in the United States, signs that economic growth remains weak such as Tuesday's weaker-than-expected US retail sales data, and dovish comments from central bankers.

Federal Reserve Chairman Jerome Powell said on Tuesday it was not time to shut down emergency programs aimed at battling the economic fallout from the pandemic. European Central Bank chief Christine Lagarde said on Tuesday an effective coronavirus vaccine will not fundamentally change the ECB's economic projections.

"Despite the optimism being expressed in equity markets, it is interesting that yesterday both Powell and Lagarde were downbeat on the economic outlook in the short to medium term," said Neil MacKinnon, global macro strategist at VTB Capital.

Germany's benchmark 10-year bond yield was steady at -0.56%, having dipped in early trade to its lowest level in 1-1/2 weeks at -0.579%.

Ten-year bond yields across the currency bloc were just a tad lower on the day. Italian borrowing costs were off session lows but kept recent record lows around 0.57% in sight.

The gap over German Bund yields hovered around 116 bps and was close to its tightest levels since early 2018.

"Yields continue to grind lower as more warning signs flash about the near term outlook. The positive vaccine news now seems but a faint echo and not the game changer many hope it to be," said Benjamin Schroeder, senior rates strategist at ING.

"Euro zone spreads appear to have eyes only for QE (quantitative easing), shrugging off volatility and EU setbacks," he said, referring to news this week that Hungary and Poland have blocked the adoption of the 2021-2027 budget and recovery fund by European Union governments.

Analysts at NatWest Markets said they believe a significant "pessimism premium" remains priced in to bond markets.

"We estimate the COVID-19 premium to be 50 bps - the recent sell-off has barely moved the needle. There could be much further for markets to go," they said in a note.

Elsewhere, Germany sold around 2.4 billion euros of 10-year bonds, while the European Commission recommended euro zone governments keep spending next year to support the economic recovery.