Euro zone yields edge up but investors cautious over Delta variant

LONDON: Euro zone government bond yields nudged higher on Monday but analysts expect the recent downward trajectory to resume after last week's US payrolls data failed to tempt investors away from the safety of fixed income.

The German 10-year Bund yield dropped 8 basis points last week - its biggest weekly fall since December 2020.

Analysts attributed the drop in euro zone yields to caution about the economic impact of the Delta variant of COVID-19 as well as expectations that the European Central Bank will remain dovish.

The US jobs report on Friday signalled economic recovery remained intact but did not warrant any immediate withdrawal of Federal Reserve stimulus. The data had little impact on US Treasury yields, which also ended the week lower.

The next test for bond markets will be the minutes of the Federal Open Markets Committee June meeting, which will be released on Wednesday. At that meeting, the Fed surprised markets by signalling two rate hikes by the end of 2023.

At 0706 GMT, the Germany 10-year Bund yield was up by half a basis point at -0.231%.

Benchmark French, Italian and Spanish 10-year yields were up by one basis point.

"The outlook for risk sentiment remains clouded by the rise in COVID-19 cases in many places in the world. Interestingly, these worries are more clearly observed in rates than in other markets," ING rates strategists wrote in a note to clients.

"This is not unusual in times when central banks retain a heavy hand in the pricing of financial assets. The logic goes like this: a further worsening of the outlook would prompt an even slower unwind of monetary support measures."

ING said that they expect to see euro zone rates skew lower over the coming days.

Commerzbank rates strategist Rainer Guntermann wrote that he expects the German 10-year yield to remain between -0.1% and -0.25% for most of the summer, and for it to move lower over the next few days.

ECB President Christine Lagarde is due to speak in a panel discussion at 0900 GMT, while Vice President Luis De Guindos is due to speak at 1700 GMT.

PMI data for Europe is also due throughout the morning but is not expected to move fixed income markets.

Euro zone inflation could come closer to the European Central Bank's goal of just under 2% "in the medium term" as the coronavirus pandemic is tamed and public spending fuels brisk economic growth, ECB board member Isabel Schnabel said on Saturday.