Euro zone yields edge higher as economy hopes offset COVID concerns

LONDON: Euro zone bond yields inched higher on Monday as investors balanced optimism about signs of a strengthening economic recovery in China with a rising tally of COVID-19 cases that could lead to more lockdown measures.

After rattling around six-week lows for much of last week, German bond yields began this week in a similar fashion.

Analysts said that much of the dovish policy tone heard from European Central Bank policymakers was already priced in.

ECB policymaker Ignazio Visco said on Sunday a recent strengthening in the euro's exchange rate was a worry and would warrant a reaction from the central bank if it dragged inflation further away from its goal.

"With souring risk sentiment and recent ECB 'dovespeak', EUR rates have already a degree of easing imbedded in them," ING analysts said in a research note.

"A weak inflation number and further dovish soundbites at the ECB watchers' conference would only reinforce this sentiment, but the question is what is there left to price?"

Strong economic data in China helped improve sentiment in stock markets and some of that optimism filtered over to bonds, where investors cut back on safer debt holdings.

The benchmark 10-year German bond yield rose 1 basis point (bp) to -0.512pc while other core euro zone bond yields were also 1-2 bps higher on the day.

Commerzbank analysts said the -0.50pc mark had "turned from support to resistance".

Tuesday sees euro zone consumer confidence and industrial sentiment data for September, with traders keen to see whether the region's economic recovery has stalled or whether it is improving.

Elsewhere Italian bond yields edged slightly lower, with the 10-year at 0.89pc, not far from last week's low of 0.827pc, which was an 11-month low.

Italian government bonds have been among the biggest beneficiaries from increasing investor confidence that a huge European Union recovery fund agreed in July and the ongoing ECB stimulus support will ease pressure on the region's most-indebted members.

Other peripheral debt market yields were unchanged on Monday.

Another busy week for new bond issuance supply looms, with Germany, France, Spain and Italy all seeking to raise more funding.