Germany's benchmark Bund yield nears -0.5%; peripheral spreads widen

Credit: REUTERS/LEONHARD FOEGER

Core euro zone government bond yields were steady on Tuesday, with German yields slipping slightly below the previous session's close, as global markets remained cautious ahead of the Federal Reserve meeting beginning later in the session.

By Elizabeth Howcroft

LONDON, July 28 (Reuters) - Core euro zone government bond yields were steady on Tuesday, with German yields slipping slightly below the previous session's close, as global markets remained cautious ahead of the Federal Reserve meeting beginning later in the session.

Germany's 10-year bond yields had their biggest fall in over a month on Monday, as U.S.-China relations deteriorated sharply.

The benchmark Bund yield was broadly flat on Tuesday, edging towards but not quite reaching -0.5%. At 1100 GMT it was at -0.491% DE10YT=RR.

The threat of a second wave of COVID-19 infections also dampened risk appetite. Asian countries imposed new restrictions while Britain threw Europe's summer reopening into disarray with a quarantine on travellers from Spain.

Peripheral government bonds sold off somewhat, with Spain's yields edging up around 2 to 3 basis points. The 10-year yield was at 0.361% ES10YT=RR.

"Part of what appears to be driving that is the fact that we've got a bunch of headlines now suggesting that there is a second wave starting to gather momentum in Spain," said Rabobank strategist Matthew Cairns.

"Obviously, this does not bode well for the economic fortunes of an economy that was really hoping to eke out something positive of what remains of the all-important tourism season," he said.

Spain, which has seen COVID-19 cases rise in recent weeks, insisted on Sunday that it is safe for tourists.

But on Tuesday the German government advised holidaymakers not to travel to several Spanish regions, including Catalonia, where Barcelona is.

The spreads between German 10-year bonds and Italian, Spanish and Portuguese equivalents widened by around 2 bps each DE10IT10=RR, DE10ES10=RR, DE10PT10=RR.

The European Central Bank upped its bond purchases last week, buying a net 27.183 billion euros ($31.89 billion) of assets as part of its quantitative easing programme, data on Monday showed.

"10y Bunds are staging the next test of the -0.50% level quicker than expected given lockdown fears and flow support," wrote Commerzbank strategists in a note to clients.

"The ongoing improvement in sentiment indicators fails to convince as markets focus on a potential next round of lockdown measures," they added.

German exporters grew more optimistic in July, the Ifo institute said.

The positive data comes after the Bundesbank said on Monday that the German economy is rebounding and may well continue to do so in the second half of the year, supported by the government's fiscal stimulus measures.

The Federal Reserve meets on Tuesday and Wednesday. It is expected to maintain its whatever-it-takes approach and perhaps signal a tolerance for higher inflation in the long-run.

An inflation gauge tracked by the European Central bank, called the five-year, five-year break-even inflation forward, rose to its highest since February, at 1.1630 EURIL5YF5Y=R.

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(Reporting by Elizabeth Howcroft; Editing by Andrew Cawthorne and Ed Osmond)

((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))

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