Euro zone bond yields edge lower, pandemic concerns weigh

MILAN: Euro zone government bond yields edged lower as pandemic fears continued to weigh on risk sentiment, while US Treasury yields rose before an auction of seven-year notes later on Thursday.

The number of new confirmed coronavirus cases in Germany increased the most since Jan. 9. The number of people with COVID-19 in French intensive care set a high for 2021.

US Treasury yields were higher in early London trading after dipping on Wednesday, when the Treasury saw average demand at an auction of five-year notes. The market appeared to stabilize after benchmark yields reached one-year highs last week.

Markets were focused on demand at the auctions after weak interest for a seven-year auction last month sparked a sell-off across the Treasury curve.

Germany's 10-year government bond yield was down one basis point to 0.37%.

"10y Bund yields are running into resistance below -0.37% but European government bonds continue to stabilise and decouple from renewed US headwinds," Commerzbank analysts told clients.

The macro backdrop remained mixed in Europe. Stronger-than- expected PMI data released on Wednesday tempered the rally in the bond market.

"The positive PMIs were eventually outweighed by concerns over still rising infection rates. Of course, the ECB buying more via the pandemic emergency programme (PEPP) in the background should have helped," ING analysts said.

The European Central Bank increased bond purchases by nearly half last week, ramping up its stimulus efforts to keep a lid on borrowing costs and convince sceptical investors it would do what it took to restrain bond yields.

The ECB and the Federal Reserve have several speakers lined up on Thursday.

"While Fed speakers are unlikely to venture far from the already well-known narrative, we think the ECB will use every opportunity - via action or word - to drive a wedge between US developments and the euro zone," ING analysts said.

Italy's 10-year government bond yield was down 0.6 basis points at 0.587%.

Italy's Treasury said it would offer a new two-year nominal bond at auction on Thursday. It will also top up an inflation-linked bond due in 2030.