German 10-year yield falls to February low as pandemic concerns weigh

MILAN: Euro zone bond yields fell as pandemic fears continued to weigh on risk sentiment on Thursday, while U.S. Treasury yields were unchanged ahead of an auction of seven-year notes.

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

Those concerns sent safe-haven assets rallying and Germany's 10-year government bond yield, the benchmark for the bloc, fell to its lowest since mid-February at -0.39pc and was last down 2 basis points at -0.375pc at 1538 GMT. Bond yields fall as prices rise.

"European government bonds continue to stabilise and decouple from renewed U.S. headwinds," Commerzbank analysts told clients, referring to the recent rise in Treasury yields.

Still, the macro backdrop remained mixed in Europe, with stronger-than-expected PMI data released on Wednesday tempering 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.

"With the ECB accelerating the pace of its bond purchases and concerns about new restrictions, we think that a significant increase in European government bonds yields is unlikely in the near term," Unicredit analysts said.

They said they preferred the "short end and the belly of the (yield) curve" as they offer a better hedge should the upward trend in yields resume, while spillover from the U.S. Treasury market "is less likely at shorter tenors."

Italy's 10-year government bond yield was last unchanged at 0.59pc.

Italy's new short-term BTP fetched a yield of -0.39pc at its debut auction on Thursday, at which the Treasury sold 4 billion euros ($4.7 billion) worth of bills.

Elsewhere, top U.S. Federal Reserve officials on Thursday continued a barnstorming effort to tell investors that the U.S. central bank's expansive support for the economy will stay in place until a quickening recovery is effectively complete.

Those speakers are closely watched in the euro area given the strong correlation between moves on U.S. Treasuries and euro zone bonds.

That recently stoked concern that the rise in Treasury yields, driven by a stronger economic outlook, would cause an unwarranted tightening of financial conditions in the euro zone.

"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 U.S. developments and the euro zone," ING analysts said.