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German 10-year bond yields set for biggest weekly drop since June

Credit: REUTERS/YARA NARDI

Germany's 10-year bond yield was set for its biggest weekly drop since June, while the broader market stabilised on Friday after measures to curb the growing number of coronavirus infections in Europe hit risk assets a day earlier.

By Yoruk Bahceli

AMSTERDAM, Oct 16 (Reuters) - Germany's 10-year bond yield was set for its biggest weekly drop since June, while the broader market stabilised on Friday after measures to curb the growing number of coronavirus infections in Europe hit risk assets a day earlier.

A growing number of European countries imposed new measures to curb a second wave of the coronavirus this week. That pushed safe-haven German bond yields to their lowest since mid-March, when the coronavirus first spread globally, and put an end to a rally that had pushed Italian bond yields to record lows.

German 10-year yields were set for their biggest weekly drop since the week ending June 12, down 9 basis points this week. DE10YT=RR

"The excess liquidity continues to support the bond market for the rest of the year, and with the possibility of a break-down in the Brexit negotiation, rising infections etc., then the safe-haven buying could continue short-term," Jens Peter Sorensen, chief analyst at Danske Bank, told clients.

But markets stabilised on Friday, with Germany's 10-year yield down 1 basis point to -0.62%.

U.S. President Donald Trump's willingness to raise his offer for a coronavirus relief package to get a deal with the House of Representatives helped risk sentiment during U.S. trading on Thursday.

The sell-off in Southern European bonds led by Italy also came to a halt on Friday, with Italy's 10-year yield down 1 basis point to 0.69%. IT10YT=RR

The risk premium Italy pays for 10-year debt on top of Germany was at 130 basis points in early trade, down from two-week highs at 136 basis points hit on Thursday. DE10IT10=RR

Analysts expect Thursday's sell-off to be temporary, noting support from the European Central Bank's emergency pandemic bond-buying programme, and investors expecting more stimulus from ECB by the end of the year, of which Italy would be a leading beneficiary.

"We do not expect yesterday's widening to gain momentum, precisely because of these technical supportive factors," UniCredit analysts said.

A number of ECB governing council members spoke on Friday. Bank of Italy Governor Ignazio Visco said it was important to avoid early withdrawals of policy because pre-COVID conditions won't return. Finland's Olli Rehn said the ECB should follow the U.S. Federal Reserve in putting more emphasis on welfare, even if it means inflation exceeds its target temporarily.

But Ireland's central bank governor Gabriel Makhlouf said there has been no change to the macroeconomic environment since the ECB's last meeting.

(Reporting by Yoruk Bahceli; editing by William Maclean, Larry King)

((Yoruk.Bahceli@thomsonreuters.com; +44 20 7542 7571; Reuters Messaging: yoruk.bahceli@thomsonreuters.com))

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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