German bond yields hover near more than two-month highs

LONDON: Yields on top-rated German government bonds dipped on Monday, but stayed within sight of more than two-month highs hit last week on the back of improving sentiment in world markets.

Progress towards a European recovery fund, more fiscal spending in Germany and Thursday's decision by the European Central Bank to expand its emergency stimulus scheme by 600 billion euros have boosted hopes for a swift economic recovery from the coronavirus shock.

Data on Monday showing German industrial output posted its steepest plunge on record in April, had only a muted impact on a market given hope by an easing of lockdown restrictions in major economies.

Germany's benchmark 10-year Bund yield nudged down 1.5 basis points to -0.29% - but remained near more than two month highs hit on Friday, when news of an unexpected improvement in the US jobs markets added to the selloff in major developed bond markets.

Bund yields are 25 bps above where they traded a month ago, and last week notched up the biggest weekly rise in almost three months.

US 10-year Treasury yields are heading back towards 1%, while Swiss 10-year bond yields hit two-month highs on Monday.

Commerzbank for the first time this year has adjusted its year-end Bund yield forecast, to -0.4% from -0.5%.

Markets are increasingly tempted to price a "V shape" recovery, said Gilles Moec, AXA group chief economist.

"We remain a bit concerned by the risks some of the advanced economies have taken with their pace of re-opening given how quickly the virus is still progressing in some places," he said in a note.

Most other 10-year bond yields in higher-rated states across the euro area were 1-2 bps lower on the day, while borrowing costs in lower-rated Italy were flat.

The closely watched Italian/German 10-year bond yield gap hovered around 170 bps - holding near its tightest levels since late March.

Focus is on ECB chief Christine Lagarde's virtual hearing with the Committee on Economic and Monetary Affairs of the European Parliament later in the day.

"It (the hearing) should foster the supportive backdrop for European government bond spreads," said Rainer Guntermann, rates strategist at Commerzbank.

"Lagarde should reiterate the pro-active stance the ECB is taking during the crisis, and probably beyond, also stressing the flexible approach under the PEPP," he said, referring to the ECB's Pandemic Emergency Purchase Programme.