Euro zone government bond yields fall, ECB in focus

MILAN: Euro zone government bond yields fell on Monday as expectations of more stimulus from the European Central Bank offset a recovery in risk sentiment amid declining uncertainty about the US elections, hopes for a coronavirus vaccine and encouraging data in Asia.

US President Donald Trump appeared on Sunday to publicly acknowledge for the first time that his Democratic rival, Joe Biden, won the Nov. 3 US presidential vote, but reiterated his false claims that the vote was rigged.

Japanese economic growth beat records and forecasts , while output in China was stronger than expected.

Such a backdrop would typically mean selling in fixed income markets, especially safe-haven ones such as Germany, but expectations for more ECB stimulus continue to underpin bonds.

Germany's benchmark 10-year Bund yield was down 1 basis point, after hitting a one-week low at -0.569%.

"The market's reaction here has been mainly driven by expectations that further monetary stimuli will be forthcoming from the ECB's December meeting," DZ Bank told customers.

Analysts forecast the ECB in December would increase and extend the Pandemic Emergency Purchase Programme. They also expect a new series of Targeted Longer-Term Refinancing Operations intended to bolster lending to small and medium-size business.

ECB President Christine Lagarde is due to speak on Monday. An earlier speech by ECB Vice President Luis de Guindos focused on banks and had little effect on government bonds.

"The key question which market participants want answered by the ECB is: What is December going to bring?" DZ Bank said.

"There will be a particularly busy schedule of ECB speakers this week including Lagarde's testimony before the EU parliament's committee, which argues for more volatility in ECB expectations," Commerzbank told customers.

The ECB stance coupled with EU stimulus has triggered a tightening in the German-Italian government bond yield spread , which today was at 115.6 basis points, close to its tightest since early 2018.

"For 10-year BTP-Bund spreads, we now target 100 basis points amid waning risks, supportive of net supply and persistent search for yield," Citi said in a research note.

"In Europe, there is an upside for the periphery as central bankers discuss December's stimulus package," said Althea Spinozzi, fixed income strategist at Saxo bank.

Italian 10-year debt yields dropped 2 basis points after hitting a week's low at 0.6%.