German bond yields fall to lowest since mid-March, Italian yields up

Credit: REUTERS/Thomas White

German government bond yields fell to their lowest since mid-March on Wednesday on coronavirus concerns and uncertainty about elections and prospects for stimulus in the United States, while Italian yields climbed ahead of Thursday's ECB policy meeting.

By Stefano Rebaudo

MILAN, Oct 28 (Reuters) - German government bond yields fell to their lowest since mid-March on Wednesday on coronavirus concerns and uncertainty about elections and prospects for stimulus in the United States, while Italian yields climbed ahead of Thursday's ECB policy meeting.

Germany's 10-year bond yield DE10YT=RR was down three basis points, after hitting -0.643%. Italy's 10-year yield IT10YT=RR was meanwhile four basis points higher at 0.74%.

The Italy-Germany bond yield spread DE10IT10=RR earlier hit its widest level since Oct. 1 at 139.8 basis points.

"ECB anticipation and lockdown anxiety loom large," Commerzbank analysts told clients.

The European Central Bank is expected to sit tight, but investors are keen to get a sense of how close it is to delivering another round of stimulus.

Many analysts expect an expansion and extension of the Pandemic Emergency Purchase Programme (PEPP) in December.

"The sluggish (Italian) BTP-performance signals sensitivity that Lagarde might not deliver on market expectations tomorrow," Commerzbank analysts added.

The ECB "should emphasise its willingness to make future interventions in the face of a deteriorating macroeconomic outlook. A strong message should be favourable to the reduction of spreads on periphery bonds," according to Franck Dixmier, Global CIO Fixed Income at Allianz Global Investors.

But the central bank's comments may also have an impact on safe-haven German government bonds, according to analysts.

"Statements by ECB officials regarding the possibility of further reductions in the depo rate might have the greatest impact on the 10-year Bund yield in the next few days," Unicredit told clients.

The interest banks receive for depositing money with the central bank overnight has been at -0.5% since September 2019.

Worries about a contested outcome in the U.S. presidential election continue to weigh on risk appetite, after President Donald Trump questioned the integrity of the U.S. election again on Tuesday. Trump also acknowledged that a U.S. coronavirus economic relief deal was likely to come after the election.

The vote will probably impact U.S. Treasuries first, while "any increase in U.S. Treasury yields, however, does not necessarily mean that Bund yields will rise, too,” according to Unicredit analysts.

The resurgent coronavirus pandemic is another source of uncertainty, with France expected to announce new restrictions later on Wednesday.

UK Vaccines Taskforce Chair Kate Bingham said on Tuesday that the first generation of COVID-19 vaccines "is likely to be imperfect" and "might not work for everyone".

Citi economic surpriseshttps://tmsnrt.rs/3ebeJ76

(Reporting by Stefano Rebaudo; Editing by Hugh Lawson)

((stefano.rebaudo@thomsonreuters.com; 0039 02 66129431))

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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