Euro zone government bond yields stabilise, eyes on European Council meeting

LONDON: Euro zone government bond yields stabilised on Friday after falling the day before, when the European Central Bank announced a record take-up of its new round of cheap loans, a form of stimulus that is expected to support the bond market.

Banks often take up cheap loans and invest the money in "carry trades", buying government bonds, particularly in southern Europe, where yields are higher.

Analysts say the take-up of targeted longer-term refinancing operations (TLTROs) should lower the yield spreads across Europe.

"Reports from large peripheral banks that they drew their max TLTRO allowance yesterday will be key in reducing perceived systemic risks in our view. This adds to the case for tighter sovereign spreads," said ING analysts in a note to clients.

The spread between German and Italian long-term government bond yields - the most watched in the market - was last at 174 basis points, compared with 319 bps in March as the new coronavirus crisis spread.

German 10-year Bund yields were little changed at -0.41pc after falling on Thursday to -0.45pc. Italian 10-year BTP yields were at 1.34pc, having fallen the day before to 1.33pc.

ING analysts also said that the 1.31 trillion euros ($1.47 trillion) of record borrowing should push down the interbank average rates at which European banks lend to one other.

"Large TLTRO take-up, especially in the periphery, will cement expectations of lower Euribor fixings, especially for longer tenors," they said.

Three-month Euribor was at -0.38pc on Friday, compared with the -0.16pc high reached in April.

Traders will be watching closely on Friday the European Council meeting via video conference, which is expected to be heavily focused on a European recovery fund.

France said on Thursday it hoped to reach an agreement on the European Union's proposed 750 billion-euro ($840.68 billion) recovery fund in July, but differences remained over whether countries like Italy should receive loans or grants.

"It is safe to say that little is expected to materialise from this meeting as regards decisions on the final fund, with today's meeting being viewed more as a preparatory session ahead of a further meeting in July," said Richard McGuire, head of rates strategy at Rabobank.

Austrian Chancellor Sebastian Kurz on Friday said he hopes the EU will agree on the fund as soon as July, but first member states need to discuss which countries should benefit most and what the money will be used for.