LONDON: Euro zone government bond yields lifted off record lows on Thursday as rallying stocks drew investors away from low-risk bonds, but post-Brexit uncertainty still left German Bund yields on track for their biggest monthly fall since January.
French, Irish and Dutch 10-year yields, which touched record lows on Wednesday on hopes for more European Central Bank stimulus to limit the negative impact of Britain's vote to leave the European Union, all edged higher.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, rose 2 basis points to minus 0.10 percent . They hit a record low of minus 0.17 percent the day after Britain's June 23 EU referendum and were on track to end June with their biggest monthly fall since January.
Analysts say that given the perceived threat from Brexit to global growth as well as low levels of inflation, demand for the lowest risk government debt is likely to remain strong.
Euro zone data on Thursday showed inflation ticked up to just 0.1 percent this month from minus 0.1 percent in May.
And market long-term inflation expectations, as measured by the euro zone five-year, five-year forward breakeven rate , hit a record low below 1.28 percent this week, way below the ECB's target of just under 2 percent.
In the wake of Britain's vote to leave the European Union, many banks have lowered their forecasts for German bond yields - expecting them to remain in negative territory for far longer than anticipated.
"We have lowered our forecasts for Bund, US Treasury and gilt yields, given weaker growth, lower underlying inflation, easier monetary policy and heightened risks," ABN AMRO said in
a note. It forecasts Germany's 10-year Bund yield to fall to minus 0.20 percent by year end.
ITALY THUMBS UP FOR ITALY
Italy meanwhile sold the top planned amount at a bond auction, paying a record-low yield of 0.33 percent on a five-year note thanks to hopes for more European Central Bank stimulus following the Brexit vote.
ECB officials, however, have said they are in no hurry to ease monetary policy in the wake of the Brexit vote.
Analysts said that while there had been some concerns that Italy's highly indebted banks could deter buyers, a pick-up in risk appetite in recent days helped provide a favourable environment around the sale.
"This sale does benefit from the backdrop of turnaround in market sentiment," said Rabobank head of rates strategy Richard McGuire. "Going forward there is a risk that appetite for future issuance may not be as strong should this issue of the banking sector move further into the market's radar."
Rome says it is concerned that banks, which hold 360 billion euros ($400 billion) of bad loans, risk coming under attack from hedge funds and sources said this week the government wanted more flexibility from the EU on state aid for lenders.
However, Germany and the European Commission said on Wednesday that Italy had to stick to EU rules.
Italian and Spanish bond yields were down about 2 basis points each , ceding early rises.
Spain's yield, which fell below Italy's for the first time in nearly a year this week after the centre-right People's Party won most seats at a weekend election, was at 1.25 percent and holding below its Italian peers.
Talk that Spain could issue a new 10-year bond soon following a sharp fall in yields after Sunday's election is on the rise, IFR reported on Wednesday.
Commerzbank analyst Michael Leister said the prospect of supply could limit the rally in peripheral debt.
"I think it can extend a bit more but, overall, given how aggressive the rally was, especially in Spanish bonds with huge outperformance versus Italy, it seems a bit stretched, particularly as everyone is now preparing for this new Spanish 10-year," he said.
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