LONDON: German bond yields dipped to a one-week low on Monday after ECB executive board member Benoit Coeure said short-term interest rates would stay at "very low levels", supporting a view that any exit from hefty stimulus will be slow.
Coeure's comments underpinned sentiment just days after the European Central Bank gave up a pledge to increase bond purchases if needed and signalled a slow route out of its stimulus. Coeure added that inflation was not quite where the ECB "would like it to be".
While investors bet that a rate rise from the ECB remains some way off, firm US jobs data on Friday reinforced expectations the Federal Reserve will lift rates this month and diverging rate views pushed out the gap between US and German bond yields once more.
The US/German 2-year yield spread was at 284 basis points, , its widest in over 20 years.
The gap between 10-year US and German bond yields was at 227 bps, its widest in more than 14 months as 10-year German bond yields fell to a one-week low at 0.625 percent.
"The lack of reaction to the strong US jobs report in European fixed income is a sign that the ECB meeting last week, by showing no inclination to rush toward the exit, has given fresh legs to the US-Europe divergence trade," said Mizuho rates strategist Antoine Bouvet.
According to a source-based story on Friday, ECB staff offered policymakers meeting last week a scenario where interest rates would be raised in mid-2019 after winding down their bond purchases at the end of this year. German short-dated bond yields also fell, while yields on other higher-rated bonds were down 1-2 bps. .
Anticipation of heavy bond supply this week limited the fall in bond yields somewhat. The Netherlands, Italy, Germany, Portugal, France and Spain are expected to auction up to 30 billion euros ($37 billion) of bonds between them.
Analysts said uncertainty over the make-up of the next Italian government after an inconclusive March 4 election was starting to weigh on Italian bonds.
The Italian/German 10-year yield gap was at 138 bps versus 135 bps on Friday.
"It is an open race as to who will form the next Italian government and this uncertainty is starting to weigh on spreads," said DZ Bank rates strategist Daniel Lenz.
Former prime minister Silvio Berlusconi on Monday called on the defeated Democratic Party to help his centre-right bloc form a government, saying Italy had to avoid a swift return to the polls.
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