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Euro zone bond yields edge down after dovish ECB messaging

  • It is essential that the macroeconomic recovery is not derailed by a premature steepening of the yield curve.
  • Safe-haven benchmark German 10-year yields fell down by about 1.5 basis point on the day to -0.585%.
Published November 26, 2020
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AMSTERDAM: Euro zone bond yields edged down on Thursday as dovish messaging from the European Central Bank's chief economist and the minutes of its October meeting provided further confirmation of widely expected stimulus at its next gathering.

Expectations of further ECB easing in December, which the bank committed to at its October meeting, have underpinned euro zone government bonds in recent weeks, though moves have been muted since they recovered from a sell-off on optimism around coronavirus vaccines.

The ECB's chief economist Philip Lane warned on Thursday that tolerating "a longer phase of even lower inflation" would hurt consumption and investment as well as cementing expectations for low price growth in the future.

Bond analysts particularly focused on Lane's statement that "it is essential that the macroeconomic recovery is not derailed by a premature steepening of the yield curve".

The ECB released minutes of its October meeting shortly after, which showed policymakers agreeing they could not afford to seem complacent during the second wave of the coronavirus, opting instead to promise more stimulus.

Safe-haven benchmark German 10-year yields fell down by about 1.5 basis point on the day to -0.585%.

Yields on Southern European bonds, the primary beneficiaries of ECB support, also edged down, with Portugal's 10-year yield falling at one point to a new record low at 0.007%, on the brink of hitting 0% for the first time ever.

The yield rose back slightly in late afternoon trading and were hovering around 0.15% at 1544 GMT.

Still, market reaction was relatively muted given the ECB had already committed to providing more stimulus in December at the October meeting.

"I don't think market expectations for (December easing) will change too much on the back of the speech and the minutes, but it just provides another confirmation," said Peter McCallum, rates strategist at Mizuho in London.

Policymakers led by ECB President Christine Lagarde have said in recent weeks that they will mainly look at more pandemic emergency bond purchases and cheap loans for banks when putting together the December stimulus package.

"It would be difficult for rates to sell off too much in Europe until then; it's unlikely that data coming up will show a positive picture," Mizuho's McCallum said.

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