Euro zone debt holds firm; Germany/US yield spread widest since March

LONDON: Government bond yields across the euro area held firm on Tuesday as dovish comments from the European Central Bank chief raised expectations for further stimulus, offsetting a brighter tone in world markets that limited gains for safe-haven debt.

ECB President Christine Lagarde said a second wave of the coronavirus pandemic risks delaying the euro zone's economic recovery.

The remarks appeared to reinforce an expectation in bond markets that more ECB stimulus is likely in the months ahead, especially given that euro zone inflation fell deeper into negative territory last month.

ECB policymaker Pablo Hernandez de Cos said that an extension or increase in the central bank's support measures could not be ruled out.

Germany's benchmark 10-year bond yield was steady on the day at around -0.508pc at 1432 GMT. It hit a 13-day high earlier in the session and is up more than 4 basis points from two-month lows hit last week.

"They (Lagarde's comments) are dovish comments but keeping in line with the main themes in markets in recent weeks," said Antoine Bouvet, senior rates strategist at ING.

"More monetary stimulus is priced in to a large extent, inflation is disappointing, the economic outlook is weak and that is pinning bond yields down."

News that US President Donald Trump was discharged from hospital following treatment for COVID-19 and prospects for a fresh US stimulus package boosted sentiment in world markets, putting upward pressure on bond yields.

But the selloff in US bond markets has been far more pronounced than in Europe.

On Monday, US 10-year bond yields rose almost 7 bps in their biggest one-day jump in around a month - pushing the gap with German Bund yields to its widest since March.

"The market has (some) faith that the Fed can overshoot its 2pc inflation target and almost no faith in the ECB's ability to get close to it," analysts at Societe Generale said in a note.

The five-year break-even inflation forward, a key market gauge of long-term inflation expectations in the euro area, fell on Tuesday to its lowest level since July at just below 1.13pc. Peripheral bond yields fell slightly.

Italy's 10-year bond yield slid 2 basis points, at 0.775pc, close to its recent record lows, reached after euro zone inflation data for September fell well below target and further into negative territory.

Spain's 10-year bond yield was also down 2 bps, at 0.238pc.

The Spanish government forecast an 11.2pc drop in the country's GDP in 2020, worse than previously expected.

Data on Monday showed the ECB bought less Italian and Spanish government debt in the past two months as market pressure on both indebted countries stayed low, despite a resurgence of COVID-19 cases.