- The yield on Germany's benchmark 10-year Bund was down 1 basis point at -0.58pc, after dropping 4 basis points on Monday, to a one-week low.
MILAN: German government bond yields edged lower on Tuesday before the European Central Bank meets this week, amid uncertainty over Brexit and the European Union recovery fund.
A two-day EU summit begins on Thursday, and the bloc is ready to set up its planned EU stimulus plan without Hungary and Poland, which are maintaining their veto of the EU budget.
"Over time, we and the markets have come to assume that the EU always avoids disaster at the last minute, but also that there will not be a big positive breakthrough," Citi analysts said, flagging risks of an adverse impact on euro zone's assets in the case of a "failure to finalise the fund".
The yield on Germany's benchmark 10-year Bund was down 1 basis point at -0.58pc, after dropping 4 basis points on Monday, to a one-week low.
Yields of peripheral countries were between flat and up 1 basis points, with Italy's 10-year BTP leading gains.
British and EU leaders are due to meet face to face to try to seal a post-Brexit trade deal after failing again to narrow their differences on Monday, increasing the chance of a disorderly split at the end of the month.
British Prime Minister Boris Johnson said on Tuesday there might come a moment when London would have to acknowledge that it was time to go for a no-deal Brexit and abandon talks.
British borrowing costs were flat, after falling 7 basis points to 0.28pc on Brexit worries on Monday. The benchmark 10-year Gilt yield was at 0.28pc.
Bunds were supported as Brexit, the EU recovery fund and a U.S. stimulus plan all remain deadlocked, according to Commerzbank analysts.
The U.S. Congress will vote this week on a one-week stopgap funding bill to provide more time for lawmakers to reach a deal on COVID-19 relief and an overarching spending bill to avoid a government shutdown.
"The ECB bid makes the difference, keeping a lid on nominal yields, which means falling real yields as inflation expectations normalize," Commerzbank added.
Analysts expect Thursday's ECB policy meeting to increase and extend the Pandemic Emergency Purchase Programme (PEPP) and to provide a more generous Targeted Longer-Term Refinancing Operation (TLTRO).
However, Deutsche Bank analysts said "there is likely to be more than just an extension of PEPP net purchases and the TLTRO discount beyond mid-2021".
According to Citi analysts, "PEPP purchases were 21.34 billion euros last week, at the highest average daily pace since June", a move that "could be in response to the rise in Bund yields during purchase period (Nov. 26/Dec. 2)".
German investor sentiment soared more than expected in December as vaccines against the coronavirus were seen to boost the economic outlook on Tuesday, but without triggering much price action on government bonds.