Euro zone yields dip after dovish ECB comments and ahead of Fed

LONDON: Euro zone bond yields edged lower on Monday, with the benchmark German yield hitting -0.5% as traders digested last week's dovish tone from European Central Bank policymakers and looked towards the Federal Reserve's two-day policy meeting.

The more positive mood across equity markets on Monday -- largely on the back of renewed hopes for a coronavirus vaccine -- did not stir euro zone debt markets with moves in yields small and many investors cautious about taking new positions before the Fed's policy meeting that concludes on Wednesday.

Euro zone yields had fallen at the end of last week after ECB chief economist Philip Lane and French central bank chief Francois Villeroy de Galhau highlighted risks from a strong currency, noting it clearly mattered for policy because it curbed price pressures.

That was after the ECB had taken an unexpectedly relaxed stance on growth and inflation at its regular policy meeting.

"Mr. Lane's comments leave the door open for further monetary stimulus by the ECB," Unicredit analysts said in a note.

"Although both EGB (Eurozone Government Bond) yields and spreads to (German) Bunds have returned to their pre-pandemic levels...the information we get looking at breakeven inflation rates confirms that action by the ECB is still needed in order to revive investor inflation expectations."

The Unicredit analysts noted that while the 10-year German Bund yield is at the same levels it was in late February before the coronavirus pandemic roiled markets, the 10-year breakeven inflation rate is 10 basis points lower.

On Monday the 10-year German yield fell 2 basis points to -0.501%, not far off what would be a three-week low of -0.509%. The 2-year yield was 1 bp lower at -0.70%.

Other core euro zone bond yields also nudged lower .

The Italian 10-year yield dropped more than 3 bps to 1.00% It last fell below the 1% level on Sept. 3. The 30-year yield slipped 4 bps to 1.927%.

This week is another busy period for central bank meetings, with the Bank of Japan and Bank of England meeting in addition to the Fed.