Bonds News

UPDATE 2-European government bond yields drop as Brexit deal hopes take a hit

* Euro zone periphery govt bond yields (Updates prices)

LONDON, Dec 7 (Reuters) - Euro zone government bond yields dropped on Monday before this week’s European Central Bank meeting, as hopes for a deal between Britain and the European Union took a blow weeks before the end of the Brexit transition.

Britain and the EU made a last-ditch attempt to bridge differences blocking a trade deal and avoid a disorderly exit in just 24 days.

“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 say 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. Short-dated two-year Gilt yields reached a one-month low and the benchmark 10-year Gilt yield fell 7.3 basis points to 0.28%.

The yield on Germany’s benchmark 10-year Bund dropped four bps to -0.58%, a one-week low. Most other euro zone yields were down 2 to 4 bps.

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

“We anticipate an expansion of the ongoing PEPP programme by 300-400 billion euros and an extension of the programme until late 2021,” said Annalisa Piazza, a fixed income analyst at MFS Investment Management. “Generous TLTROs will likely be extended further and some tweaks might be added in order to further incentivise loans from the banking sector.”

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 1% level on optimism over a 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.

Reporting by Abhinav Ramnarayan; Editing by Hugh Lawson