Euro zone bond yields edge up on lockdown exit hopes

Credit: REUTERS/Regis Duvignau

Borrowing costs across the euro area nudged up on Monday, reflecting some hopes for the global economic outlook as more countries look to restart their economies after coronavirus lockdowns.

By Dhara Ranasinghe

LONDON, May 11 (Reuters) - Borrowing costs across the euro area nudged up on Monday, reflecting some hopes for the global economic outlook as more countries look to restart their economies after coronavirus lockdowns.

Lingering concerns about the repercussions from last week's German court ruling for European Central Bank monetary policy and a sell off in European shares also weighed on Italian bonds.

France was cautiously emerging from its lockdown on Monday and Britain on Sunday outlined plans to begin slowly easing its restrictions.

The quicker countries can restart their economies, the greater the chances of a swift rebound from the coronavirus economic shock.

"The focus is on the restarting economies and risk sentiment has a chance to recover further despite the dreadfully weak economic data for April," said Commerzbank rates strategist Rainer Guntermann.

"With the weekend newsflow not sending any fresh warning signals, the air for Bunds is getting thinner and 10-year bond yields should rise above -0.5%."

Germany's benchmark 10-year Bund yield briefly rose to -0.5% DE10YT=RR. It was last up 2 basis points on the day at -0.51% but not far off 1-1/2 month lows hit at the end of April -- reflecting a heavy dose of caution among bond investors over the economic outlook.

Italy's 10-year bond yields were last up six bps on the day at 1.85% IT10YT=RR.

Moody's ratings agency left Italy's ratings unchanged on Friday, but DBRS Morningstar cut Italy's ratings trend to "negative" from "stable".

DBRS blamed considerable uncertainty over the economic repercussions stemming from the COVID-19 outbreak, adding that Italy's rating outlook remains weak.

Mizuho bond strategists said they expected the "fundamental weakness" of the periphery to persist.

"The trajectory towards a sub-IG (investment grade) rating for Italy remains inexorable, and it is only a matter of time before funds begin to move to pre-empt rating downgrades," they said in a note.

Italian bonds have also been hurt in the past week by a German constitutional court ruling that cast doubt over the future of the European Central Bank's bond-buying programmes, which has helped lower Italian borrowing costs.

The European Commission could open a legal case against Germany over the court ruling, the EU executive arm said on Sunday.

The EU's top court - which had previously given its green light to the ECB scheme - and the European Commission have said that EU law holds precedence over national regulations.

"It is a worry that a court in a big European country is making this ruling but it is also clear that the ECB is not under its jurisdiction as the European Court of Justice has already ruled that the ECB is not overstepping its mandate," said Matthias Weber, an economist at the University of St. Gallen.

(Reporting by Dhara Ranasinghe Editing by David Goodman and Louise Heavens)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

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