Euro zone bond yields dip as investors remain cautious


By Yoruk Bahceli

AMSTERDAM, Oct 27 (Reuters) - Euro zone bond yields dipped on Tuesday as the continued rise in coronavirus cases and a lack of progress on U.S. stimulus kept investors cautious before Thursday's European Central Bank meeting.

White House economic adviser Larry Kudlow said on Monday that talks over a coronavirus relief package have slowed, although House Speaker Nancy Pelosi remained hopeful an agreement could be reached before the Nov. 3 election.

At the ECB meeting, the bank is not expected to change its policy, but investors will watch for hints on how likely it is to add to its bond purchases in December.

Banks in the euro zone curtailed access to corporate credit in the third quarter and expect to tighten further as they grow increasingly worried about a fresh wave of coronavirus cases, an ECB survey showed on Tuesday.

"Ahead of the ECB on Thursday and the U.S. presidential election in just one week, we expect EGB (euro government bond) markets to stay in a tight range with no additional risk positions being taken on," Piet Haines Christiansen, chief analyst at Danske Bank, told clients.

Germany's 10-year bond yield was last down 1 basis point at -0.58%. DE10YT=RR

Although rising coronavirus cases across Europe are causing alarm, the safe-haven German bond's yield remains above the seven-month low of nearly -0.64% it reached earlier in October as the second wave of the virus hit.

Italian 10-year bond yields, which fell as much as 9 basis points on Monday to a one-week low after S&P lifted the outlook on Italy's credit rating, were down 1 basis point to -0.72%. IT10YT=RR

Little changed from a day earlier, Italian bonds had already erased much of their advance in later trading on Monday due to the coronavirus worries and the setback to U.S. stimulus hopes.

That means the gap between Italian and German 10-year yields - effectively the risk premium on Italian debt - is just 3 basis points lower than Friday's close, prior to S&P's outlook upgrade, at around 130 basis points. DE10IT10=RR

"With almost unanimous expectations, including ours, of a QE (quantitative easing) boost in December, we fail to see how the ECB could deliver a dovish enough message to validate them on Thursday," ING analysts told clients.

"Higher-volatility fixed income markets, the ones depending the most on ECB intervention to sustain their pricing, appear most at risk," they said, seeing room for the 10-year Italian spread to widen to 140 basis points.

In the primary market, Italy sold 3.25 billion euros in an auction of an inflation-linked bond due 2026 and a two-year zero-coupon bond.

(Reporting by Yoruk Bahceli. Editing by Larry King and Jan Harvey)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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