Euro zone government bond yields fall; focus on ECB

LONDON: Demand for German government debt increased on Tuesday and yields fell across the euro zone as a whole, as Monday's global risk-on mood started to fade and investor attention focused on the European Central Bank's meeting on Thursday.

The ECB is expected to increase its 750 billion-euro bond-buying programme, Pandemic Emergency Purchase Programme, or PEPP, on Thursday, probably by around 500 billion euros.

But a news report by MNI, which cited unnamed ECB officials, said that many members of the ECB's governing council would oppose adding to the asset-purchase programme, preferring to wait as long as several months.

"The hawks had been remarkably silent in the run-up to the blackout period, and according to the sources story, a majority is reportedly preferring to wait until September to raise PEPP," wrote Commerzbank strategists in a note to clients.

"Such second thoughts should limit the downside in BTP-spreads near-term," they added.

Core government bond yields were down by around two to three basis points in early London trading.

Safe-haven German 10-year bond yields, which yesterday rose 5 bps to a three week-high of -0.39pc, were last down 3 bps at -0.42pc.

Italian government bond yields were flat, with the 10-year yield last down around one basis point, at 1.46pc.

The Germany-Italy 10-year yield spread -- which last week fell to its narrowest since the end of March -- was flat at 188 basis points.

Italian yields posted their biggest monthly fall in four months in May, boosted by the likelihood the country will get grants from the European Union to support its coronavirus-hit economy.

The EU's coronavirus recovery fund was proposed by the European Commission last Wednesday, and on Friday Germany's foreign minister said that there is still a long way to go until talks on the fund are concluded.

The so-called "Frugal Four" countries - Austria, Denmark, the Netherlands and Sweden - are expected to issue a list of objections to the proposals in the coming days.

The first bi-monthly break-down of the ECB's asset- purchasing programme will be released today. Commerzbank analysts said it should show the purchases' bias towards Italian and other periphery government bonds.