Euro zone bond yields dip as caution returns

LONDON: Euro zone bond yields dipped on Tuesday as concerns about rising COVID-19 cases in major economies offset the promise of a return to normality due to a vaccine and cautious optimism about Brexit trade talks.

Bond yields rose on Monday after an extension of trade talks between Britain and the European Union eased fears of a messy parting of ways between the two.

But the selling in bond markets was modest, with yields inching back down early on Tuesday as the latest coronavirus news injected a fresh dose of caution into world markets.

Germany's benchmark 10-year bond yield dipped to -0.627pc , nearing recent one-month lows of around -0.64pc.

Italy will need to impose new restrictions during the holiday season to rein in contagion and avoid a third, devastating wave of the coronavirus, the prime minister said in an interview published on Tuesday.

Germany, Europe's biggest economy is unlikely to lift its lockdown early next year, a top aide to Chancellor Angela Merkel said on Monday. London, meanwhile, will move into England's toughest tier of restrictions on Wednesday.

"The market remains wary of the light at the end of the tunnel," said Commerzbank rates strategist Rainer Guntermann.

"While Bunds remain torn between vaccine hopes and lockdown concerns, spreads continue to tighten as the ECB 'preserves favourable funding conditions'," he added, referring to hefty European Central Bank stimulus that has pinned down borrowing costs.

In southern Europe, Spain's 10-year bond yield touched a new record low of -0.004pc. Italy's 10-year bond yield was a touch lower on the day at 0.50pc, also keeping record lows in sight. That left the gap over benchmark German Bund yields hovering around 112 basis points.

Antoine Bouvet, a senior rates strategist at ING, said the current backdrop was also favourable for a near-term tightening in the gap between U.S. and European bond yields.

"Barring an imminent trade deal, Brexit optimism should slowly deflate, leading to lower rates," he said.

"Recent lockdown announcements suggest that gloom will persist on both sides of the Atlantic, and drive a temporary re-tightening of the U.S. and euro rates differential."