Euro zone yields near seven-month lows as ECB speakers line up

Credit: REUTERS/LEONHARD FOEGER

Euro zone government bond yields traded near seven-month lows on Monday before a series of speeches from European Central Bank policymakers, with investors looking for clues on monetary policy easing before the end of the year.

By Abhinav Ramnarayan

LONDON, Oct 19 (Reuters) - Euro zone government bond yields traded near seven-month lows on Monday before a series of speeches from European Central Bank policymakers, with investors looking for clues on monetary policy easing before the end of the year.

ECB President Christine Lagarde is due to speak at the 16th Congress of the French Regions at 12.40 GMT, and is one of four ECB board members scheduled to speak on Monday. EM

With a second wave of COVID-19 infections sweeping Europe and new restrictions introduced by a number of governments, bets are that the region's top policymakers will strike a dovish note.

"Speculation has been building that the ECB will be easing policy before the end of the year, so if Lagarde et al don't give hints to the contrary, bond investors' expectations will look increasingly correct," DZ Bank analysts said in a note.

Germany's benchmark 10-year government bond yields were at -0.61% on Monday, more than 10 bps below the current ECB deposit rate, suggesting investors are expecting further easing. DE10YT=RR

Long-term euro zone inflation expectations also remain muted, with a key gauge - the five-year, five-year forward swap - near a three-month low at 1.1286%. EUIL5YF5Y=R

High-grade euro zone yields are one to three basis points higher on the day, but only after one of the biggest weekly declines since June last week.

Spanish and Italian yields were up even more, with both their 10-year borrowing costs rising by five basis points on the day after hitting lows last week. IT10YT=RR,ES10YT=RR

"It's a consolidation move after a long rally, but there's a tension between the monetary policy and the fact that you can see the real economy is deteriorating," said Mizuho's head of rates, Peter Chatwell.

"The second wave of COVID-19 is having a greater impact on the Spanish economy and perhaps the Italian economy, so we have some imbalances coming back to the fore in the coming weeks," he said.

October's purchasing managers' index data due later in the week should give an indication of the impact of the second wave of infections, he said.

In terms of supply, a highly anticipated round of bond issuance from the European Union could appear as early as this week, analysts believe.

(Reporting by Abhinav Ramnarayan; editing by Larry King)

((Abhinav.Ramnarayan@thomsonreuters.com; 0044 751 745 1044;))

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