UPDATE Euro 1 zone bond yields drop to 13-day low after ECB reinsurance
* Yields on government bonds from the periphery of the euro area tmsnrt.rs/2ii2Bqr (Updates prices, adds comments and Ifo data)
LONDON, May 25 (Reuters) – Fading inflation fears saw eurozone government bond yields decline for the third day in a row on Tuesday, Italy’s 10-year yield down 5 basis points , as the market sold last week.
Last week, the 10-year German Bund yield hit two-year highs, while Italian yields hit their highest since September, with investors betting that stronger economic growth could prompt the European Central Bank to soon slow down the pace of its emergency bond purchases.
But yields started falling on Friday when ECB President Christine Lagarde said it was still too early for the ECB to discuss reducing the stimulus.
ECB politician Yannis Stournaras said on Tuesday he saw no reason to change the bank’s bond buying program.
The German benchmark 10-year Bund yield fell 2 bps to -0.158% at 11:30 a.m. GMT, its lowest in 13 days.
Italy’s 10-year yield fell below 1% for the first time since May 13 and fell 4bp to 0.9738%.
The Dutch 10-year bond entered negative territory for the first time since May 12.
Yields on US Treasuries were also somewhat lower after Federal Reserve officials made dovish comments, stating their support for continued monetary policy.
Investors are now awaiting policy advice from ECB chief economist Philip Lane, who is due to speak at 14:00 GMT.
“The reduction in ECB expectations has eased and, in turn, spreads are expected to tighten. We believe Eurozone bonds will outperform US and UK bonds on the basis of a more accommodating ECB, ”said Peter McCallum, rate strategist at Mizuho.
“We generally think yields will rise as summer data shows positivity in Europe, but with short-term ECB support we would probably be long for this week,” he added.
ECB rate regulators will review the pace of emergency bond purchases at their June 10 meeting amid improved economic conditions. Growth and inoculation rates increase in the block as COVID-19 cases decline.
The German economy contracted more than expected in the first quarter, as coronavirus restrictions prompted households to invest more money than ever in savings, data showed on Tuesday.
Germany’s Ifo survey showed German corporate morale improved more than expected in May – but the data did not affect bonds.
ING strategists wrote in a note to clients that eurozone bond markets are more likely to withstand the good economic news due to technical factors such as low supply and the approaching end of the month. (Reporting by Elizabeth Howcroft. Editing by Mark Potter and Chizu Nomiyama)