June 17, 2020 / 10:40 AM / 25 days ago

UPDATE 2-Euro zone bond yields steady after Germany sells new Bund

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds details)

By Dhara Ranasinghe and Yoruk Bahceli

LONDON, June 17 (Reuters) - Government bond yields in the euro area were relatively steady on Wednesday as Germany sold a new 10-year Bund and hopes for a rapid economic recovery from the coronavirus shock held sway for now.

Bond markets have been pulled between competing forces with brighter economic data, such as Tuesday’s U.S. retail sales, pushing yields up but concern about a second wave of the coronavirus and further signs of central bank support limiting any selling.

“The tension between better economic data and rising COVID-19 cases continues to drive market volatility,” said Antoine Bouvet, senior rates strategist at ING in London.

A full U.S. economic recovery will not occur until Americans are sure that the virus has been brought under control, Federal Reserve Chair Jerome Powell said on Tuesday.

“Markets see the glass half full, thanks to central bank support,” Bouvet added.

Germany’s benchmark 10-year Bund yield was down around 1 basis point at -0.44% in late trade, reversing an earlier rise as markets digested the sale of 4.14 billion euros of a new Bund. That was its largest 10-year issue since 2014, according to data from the country’s finance agency.

Peter McCallum, a rates strategist at Mizuho, said the bond auction was “relatively well received.”

Demand exceeded the amount sold by 1.8-times, down from 2.4-times at the previous sale but still far above the average demand of 1.35-times, according to IFR analysts..

The sale came as Germany’s government passed another supplementary budget that will push up new borrowing to a record 218.5 billion euros this year.

In Southern Europe, Italy’s 10-year bond yield was up around one basis point at 1.38%.

Focus in European bond markets now shifts to Thursday’s European Central Bank funding round of cheap long-term loans to banks — a three-year TLTRO at minus 1%.

Around 1.4 trillion euros is expected to be taken up, which would make it the ECB’s biggest single lending operation.

“We think the amount of liquidity coming into the system can benefit most fixed income products, and the TLTRO III numbers will indeed give a more explicit indication of how attractive banks think the current rates are,” Mizuho’s McCallum said.

The loans are positive for bond markets as banks are expected to use the cheap funds in “carry trades”, where they buy higher yielding assets, most likely short-dated government bonds from peripheral countries such as Italy.

Reporting by Dhara Ranasinghe and Yoruk Bahceli Editing by Alexander Smith, Kirsten Donovan

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