COVID-19 lockdown fears trigger European bond rally

Nov 19 (Reuters) - Euro zone bond yields slumped on Friday and Germany's entire yield curve fell into negative territory for the first time since August after Austria announced it would become the first country in western Europe to reimpose a full COVID-19 lockdown,

The market anguish was exacerbated by speculation Germany could follow suit.

Germany's coronavirus situation is so grave that a lockdown, including for people who have been vaccinated, cannot be ruled out, Health Minister Jens Spahn said on Friday. read more

Europe has become the epicentre of the pandemic again in recent weeks. Markets, which had been relatively calm now have to weigh the impact additional measures may have.

"It's just building, that story of the pandemic not being quite over in Europe and that's a knee-jerk flight to quality. That's why you're seeing Bunds performing," said Peter McCallum, rates strategist at Mizuho.

Germany's 10-year yield , the benchmark for the euro area, at one stage fell to -0.344%, a drop of about 6 basis points, reversing early-session rises.

At 1557 GMT it was settling at -0.333%.

Germany's 30-year yield, which had risen as high as 0.4% in mid-October turned negative during part of the session for the first time since August . It made its way back to 0.02% in late afternoon trading.

The two-year yield dropped to the lowest since early August at -0.787%.

Elsewhere in the bloc other 10-year yields were 4-5 basis points lower , , , .

"A total lockdown for Germany would be extremely bad news for economic recovery," said Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel.

"It's exactly what we saw in July, August of this year in parts of the world where the Delta was big, it came back and it slows down the recovery again."

German yield curve

Money markets have scaled back bets on an ECB rate hike next year, no longer pricing a full chance of a 10 basis point rate hike by December 2022, though the probability is still seen above 50% .

Little attention seemed to be paid to Bundesbank president Jens Weidmann who publicly contradicted the European Central Bank's official line. He said inflation may stay above 2% for some time and that the ECB should avoid any commitment to keeping the money taps open.

Prior to the lockdown announcements, ECB president Christine Lagarde said high inflation would fade so the bank should not tighten policy. She also hinted at continued bond purchases next year. read more

A market gauge of long-term euro zone inflation expectations fell below 1.90% for the first time in two weeks at 1.8816%

Data earlier showed German producer prices increased 3.8% month-on-month in October, far above the 1.9% rise forecast in a Reuters poll, in further evidence of growing inflationary pressures.

Greek credit ratings will be reviewed by Moody's later on Friday. The agency rates Greece at Ba3, three notches below investment-grade level but some analysts reckon an upgrade is likely.

Reporting by Yoruk Bahceli, additional reporting by Julien Ponthus and Dhara Ranasinghe; Editing by Sujata Rao and Barbara Lewis

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