* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Trump on rescue package, strategist quote)
LONDON, Oct 8 (Reuters) - European government bond yields fell on Thursday, as rising coronavirus cases in Europe and longer-term uncertainty kept sentiment subdued, while equity markets were lifted by expectations for more U.S. stimulus and lower-for-longer rates.
Germany’s benchmark Bund yield was down 3 basis points at -0.522%, while Portugal’s 10-year yield was at 0.207% after hitting its lowest since March at 0.203%. Italy’s 10-year yield fell 2 bps at 0.761%, after hitting its lowest since September 2019 at 0.759%.
U.S. President Donald Trump saying there is a good chance to reach a deal on a fresh stimulus package did not trigger much action in European markets, while U.S. Treasuries pared their gains.
“It could just simply be tactical, technical, a retracement after quite some notable back-up in yields - certainly in the U.S.,” Richard McGuire, rates strategist at Rabobank said, referring to Thursday’s yields fall.
European Central Bank (ECB) Vice President Luis de Guindos, commenting on “subdued” inflation expectations in the euro zone, said that the central bank has to use all the tools at its disposal.
Minutes from the ECB’s September meeting showed that policymakers argued for a “free hand” to fight the economic damage caused by the coronavirus pandemic.
Daniel Lenz, rates strategist at DZ Bank, said underlying uncertainty in markets was keeping core yields down.
“ECB impact is so big that in general the spreads have a continuous downward trend and yields remain on a very low level,” he said.
“I don’t see much movement for the German yield going higher than -0.50%,” he said, citing the U.S. presidential elections, Brexit uncertainty and rising COVID-19 infections in Europe, which have surged in countries including France, Germany and Poland.
This followed renewed hopes on Wednesday for a U.S. fiscal stimulus package which had driven euro zone yields higher, while in the United States, Treasury prices fell and the yield curve steepened.
The U.S. central bank has room to expand its balance sheet, but what businesses and households really need is more government grants and aid, Chicago Federal Reserve Bank President Charles Evans said on Wednesday.
The spread between German and U.S. 10-year yields was 129 bps, close to its widest since March.
“It is still closer to crisis levels than to more normal levels, but the path that the spread is on is an auspicious one. What we want to see here is a classic U.S. recovery that helps to lift the likes of Europe in the same direction,” ING rates strategists said in a note to clients.
“The bond market is in the early phase of pricing in that exact likelihood. But we still have some way to go.” (Reporting by Elizabeth Howcroft, additional reporting by Stefano Rebaudo; Editing by Lisa Shumaker)
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