European yields lower before ECB meeting; focus on stimulus, Brexit

MILAN: Euro zone government bond yields edged lower on Tuesday before the European Central Bank meets later this week, while uncertainty remained over Brexit and a European Union recovery fund.

A two-day EU summit begins Thursday, and the bloc is ready to set up its planned EU stimulus without Hungary and Poland, which are maintaining their veto of the EU budget.

British and EU leaders will meet face to face to try to seal a post-Brexit trade deal after failing again to narrow their differences on Monday, increasing the chance of a disorderly split at the end of the month.

British borrowing costs were down, after falling 7 basis points to 0.28% on Brexit worries on Monday. The benchmark 10-year Gilt yield dropped 1 basis point.

Bunds are supported as Brexit, an EU recovery fund and a U.S. stimulus plan all remain deadlocked, according to Commerzbank analysts.

The U.S. Congress will vote this week on a one-week stopgap funding bill to provide more time for lawmakers to reach a deal on COVID-19 relief and an overarching spending bill to avoid a government shutdown.

The yield on Germany's benchmark 10-year Bund was down 1 basis point, after dropping 4 basis points on Monday, to a one-week low.

"The ECB bid makes the difference, keeping a lid on nominal yields, which means falling real yields as inflation expectations normalize," Commerzbank added.

Analysts expected Thursday's ECB policy meeting to increase and extend the Pandemic Emergency Purchase Programme (PEPP) and a more-generous Targeted Longer-Term Refinancing Operation (TLTRO).

However, Deutsche Bank analysts said "there is likely to be more than just an extension of PEPP net purchases and the TLTRO discount beyond mid-2021."