Euro zone government bond yields fall, ECB in focus

European Union flags flutter outside the European Commission headquarters in Brussels, Belgium

Euro zone government bond yields fell on Monday as expectations of more stimulus from the European Central Bank offset a recovery in risk sentiment amid declining uncertainty about the U.S. elections, hopes for a coronavirus vaccine and encouraging data in Asia.

U.S. President Donald Trump appeared on Sunday to publicly acknowledge for the first time that his Democratic rival, Joe Biden, won the Nov. 3 U.S. presidential vote, but reiterated his false claims that the vote was rigged.

Japanese economic growth beat records and forecasts, while output in China was stronger than expected.

Such backdrop would typically mean selling in fixed income markets, especially safe-haven ones such as Germany, but expectations for more ECB stimulus continue to underpin bonds.

“The market’s reaction here has been mainly driven by expectations that further monetary stimuli will be forthcoming from the ECB’s December meeting,” DZ Bank told customers.

Attention is likely to be on central bank speakers, with ECB board member Luis de Guindos and President Christine Lagarde due to speak on Monday.

“A veritable Who’s Who of central-bank representatives will be gathering at the microphones today. The key question which market participants want answered by the ECB is: What is December going to bring?” DZ Bank said.

In early trade, Germany’s benchmark 10-year Bund yield was down 1 basis point at -0.55% DE10YT=RR. Italian 10-year debt yields IT10YT=RR dropped to a week’s low at 0.605%, down 3 basis points.

The German-Italian yield spread tightened by 2 basis points to 115.6 basis points DE10IT10=RR. It remains close to its tightest since early 2018.

Analysts expect the ECB in December to increase and extend the Pandemic Emergency Purchase Programme. They also expect a new series of Targeted Longer-Term Refinancing Operations intended to bolster lending to small and medium-size business.

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