Stimulus Check – UPDATE 3-German bonds catch safety bid, yields tumble to February low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
MILAN, July 19 (Reuters) – German bond yields tumbled on Monday to the lowest since mid-February as concerns over the economic impact of surging Delta coronavirus cases drove investors to stampede into safe-haven assets.
Countries worldwide are extending or re-introducing activity curbs in response to the rising infections. In Britain, which bucked the trend by dropping all activity curbs from Monday, Prime Minister Boris Johnson and finance minister Rishi Sunak were forced into self-isolation after the country’s health minister tested positive with the virus.
As stock markets tumbled and U.S. Treasury borrowing costs plumbed February lows below 1.24%, German bonds rallied, pushing 10-year yields down 5 basis points (bps) to -0.396%, having fallen to -0.402% earlier.
Thirty-year yields slipped as low as 0.06%, also the lowest since mid-February.
Euro zone yields are also being pressured by indications the European Central Bank (ECB) might need to extend its ultra-accommodative policies if it is to meet the new 2% inflation target unveiled earlier this month.
At this Thursday’s meeting, ECB policymakers may face off over their new policy path and how much more stimulus, mainly in the form of bond purchases, will be needed.
Daniel Lenz, bond strategist at DZ Bank, said the resurgence of the Delta variant was partly behind the fall in yields but also that “investors are waiting for answers from the ECB, and most of them expect the central bank to stick with its expansionary stance.” Statements from ECB president Christine Lagarde imply the bank may not immediately end its PEPP emergency stimulus programme when it expires in March 2022.
Analysts at TD Securities noted the recent rapid Treasury rally had taken the spread between 10-year German and U.S. yields to the tightest since February. But they added: “The ECB’s lower-for-longer policy argues for Bund outperformance versus Treasuries. Further, we believe that the Fed will taper QE at year-end in the face of a strong recovery.”
Meanwhile, Germany’s 10-year real yield – the borrowing cost after stripping out inflation effects touched its lowest since August 2019 at -1.686%, according to Refinitiv data
The inflation-adjusted yield for the euro area as a whole – measured by the difference between the euro 10-year swap rate and euro 10-year inflation-linked swap rate – fell to minus 1.54%, a record low.
Yields on a European Union bond issued in June were down 1.5 bps, hitting an all-time low at -0.119%.
An ECB pivot towards more bond-buying would benefit Southern European nations, and Spanish and Portuguese 10-year yields slipped 2 to 4 basis points by 1515 GMT . Italian 10-year yields were flat around 0.70%, giving up an earlier marginal rise.
Reporting by Stefano Rebaudo; additional reporting by Sujata Rao Editing by Mark Potter and Alex Richardson