European government bond yields drop as Brexit deal hopes take a hit

LONDON: Euro zone government bond yields dropped on Monday ahead of this week's crucial European Central Bank meeting and with hopes for a deal between Britain and the European Union taking a blow just weeks before the end of the transition period.

A Brexit deal hung in the balance on Monday as Britain and the EU made a last-ditch attempt to bridge significant differences to strike a trade deal that would avoid a disorderly exit in just 24 days time.

"There is no clear sign that a deal will be made, and a French veto of any unfavourable deal limits chances," said Peter Chatwell, head of rates at Mizuho.

Mizuho researchers believe sterling looks mispriced as a result and expect downward pressure on British Gilt yields through the week despite rising supply.

While European government bond yields dropped across the board on Monday, British borrowing costs led the move, with the benchmark 10-year Gilt yield falling five basis points to 0.29pc.

The yield on Germany's benchmark 10-year Bund dropped four bps to -0.58pc, a one-week low.

This week's ECB meeting is also putting downward pressure on yields, with policymakers expected to announce further unprecedented stimulus to help prop up an economy battered by the pandemic.

"Even with already high expectations, we think the importance of Thursday's ECB package should not be understated," ING analysts said in a note. They believe the unprecedented amount of monetary easing announced this year will be maintained in 2021, and for part of 2022.

The fall in yields comes after a hefty rise in rates late last week that saw 10-year U.S. Treasury yields flirt with the crucial 1pc level on optimism over a giant stimulus package intended to boost the world's biggest economy.

But a spike in COVID-19 cases over the weekend has dashed some of the optimism, and global markets and oil prices have taken a step back, boosting demand for safe haven European government debt.