July 28, 2020 / 11:30 AM / 14 days ago

UPDATE 2-German bond yields fall to 2-month low on fears of second COVID-19 wave

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

By Elizabeth Howcroft

LONDON, July 28 (Reuters) - Germany’s 10-year bond yield fell to its lowest in over two months on Tuesday, as markets remained cautious on the prospect of a second wave of coronavirus infections and the upcoming Federal Reserve meeting.

Bund yields continued to fall after having their best day in over a month on Monday, as U.S.-China relations deteriorated sharply.

The benchmark 10-year yield fell to -0.517% on Tuesday, its lowest since May 22. It was down two basis points in late trade.

The threat of a second wave of COVID-19 infections also dampened risk appetite. Asian countries imposed new restrictions while Britain threw Europe’s summer reopening into disarray with a quarantine on travellers from Spain.

Peripheral government bond yields rose, with Italian and Spanish 10-year yields up 2-3 basis points .

“Part of what appears to be driving that is the fact that we’ve got a bunch of headlines now suggesting that there is a second wave starting to gather momentum in Spain,” said Rabobank strategist Matthew Cairns.

“Obviously, this does not bode well for the economic fortunes of an economy that was really hoping to eke out something positive of what remains of the all-important tourism season,” he said.

On Tuesday the German government advised holidaymakers not to travel to several Spanish regions, including Catalonia, where Barcelona is.

The closely watched gap between German and Italian 10-year bond yields widened around 6 bps to 157 bps.

The spreads between German 10-year bonds and Italian, Spanish and Portuguese equivalents widened by around 2 bps each .

“10y Bunds are staging the next test of the -0.50% level quicker than expected given lockdown fears and flow support,” wrote Commerzbank strategists in a note to clients, a level analysts previously said they would struggle to fall below.

“The ongoing improvement in sentiment indicators fails to convince as markets focus on a potential next round of lockdown measures,” they added.

German exporters grew more optimistic in July, the Ifo institute said.

The positive data comes after the Bundesbank said on Monday that the German economy is rebounding and may well continue to do so in the second half of 2020.

A gauge of long-term inflation expectations tracked by the European Central bank rose to its highest since February at 1.163%.

The Federal Reserve meets on Tuesday and Wednesday, expected to maintain its whatever-it-takes approach.

The bank announced on Tuesday it extended several of its lending facilities through to year-end in another sign of dialing back expectations of economic recovery.

Reporting by Elizabeth Howcroft; additional reporting by Yoruk Bahceli Editing by Andrew Cawthorne, Ed Osmond, William Maclean

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