May 13, 2020 / 10:06 AM / 11 days ago

UPDATE 2-Fear of coronavirus second wave supports euro zone bonds

* Bund yields fall after three days of rises

* BTP yields fall despite hefty auction

* Finland first euro zone sovereign to sell dollar bond in 2020

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, comments, Finnish bond sale)

By Elizabeth Howcroft and Yoruk Bahceli

LONDON, May 13 (Reuters) - Euro zone government bond yields fell on Wednesday as fixed income assets were supported by concern over the pace of economic recovery and the risk of a second wave of coronavirus infections.

Yields had risen in recent weeks as the spread of the novel coronavirus slowed in some Asian and European countries and parts of the U.S. economy began to reopen after lockdowns.

But analysts said optimism was fading.

“I think there’s a dawning realisation that this isn’t going to be a V-shaped recovery,” Lyn Graham-Taylor, fixed income strategist at Rabobank, said.

“People are just taking a second look at the fact that there are still massive restrictions and worries about resurgence of cases.”

Stock markets slid globally as the concerns about a second wave of infections darkened the mood after Federal Reserve chairman Jerome Powell said the U.S. faced a significantly worse recession than any since World War II.

Safe-haven bond yields fell. The 10-year benchmark was set to close the session lower after three consecutive sessions of rises. It was down 2 bps on the day to -0.53%.

The Italian 10-year government bond yield rose in early trading before changing direction and was last down 8 bps to 1.80%.

That was despite a hefty amount of issuance. Italy sold 9 billion euros ($9.75 billion) of debt in an auction, where it paid some of the highest yields since June 2019.

“The big unknown is the ECB flows - the PEPP purchases and whether and how much they could have contributed (to the rally),” Commerzbank rates strategist Rainter Guntermann said, referring to the bank’s emergency bond purchases.

Data on Monday showed the bank’s overall purchases last week were the highest on record.

In other issuance, Finland raised $1.5 billion via a 10-year bond sold by a syndicate of banks, according to Refinitiv news service IFR.

Its first dollar bond sale in three years made Finland the first euro zone sovereign to sell a public dollar bond this year, while borrowing in euros has spiked as governments have increased issuance to fund vast coronavirus stimulus measures.

Germany’s Chancellor Angela Merkel told lawmakers on Tuesday that Germany must help its European Union neighbours revive their economies after the coronavirus crisis.

“We’ve heard really similar sentiment from Merkel before and when it comes down to it, it just fails to deliver on any meaningful front,” Rabobank’s Graham-Taylor said.

European Union legal action against Germany over a ruling by the country’s top court that targeted the European Central Bank would “would weaken or endanger” the bloc in the long run, one of Germany’s Constitutional Court judges told a newspaper.

The European Commission will propose an EU recovery package in response to the pandemic, which envisages loans and also grants.

Commerzbank’s Guntermann said the inclusion of grants could provide some relief to peripheral states, whose borrowing costs have risen as the focus has sharpened on the sustainability of their debt.

In the United States, Fed chair Powell pledged to use more of the central bank’s power as needed, but made it clear it won’t push interest rates below zero, as markets have been betting. ($1 = 0.9228 euros)

Reporting by Elizabeth Howcroft and Yoruk Bahceli Editing by Alexander Smith, Carmel Crimmins and Barbara Lewis

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