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Eurozone bond yields inch up on Draghi's stimulus stance

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Outgoing ECB President Mario Draghi said at the Academy of Athens, Greece, on Tuesday that the most effective treatment for the eurozone's sluggish economy would be investment-led stimulus at the euro area level. PHOTO: REUTERS

London

EUROZONE bond yields inched up on Wednesday after another speech from outgoing European Central Bank chief Mario Draghi calling for fiscal stimulus to boost the region's sluggish economy.

The most effective treatment for the eurozone's sluggish economy would be investment-led stimulus at the euro area level, Mr Draghi said in a speech on Tuesday evening in Athens.

While bond yields tumbled last week as inflation expectations fell, calls for fiscal stimulus are weakening demand for fixed income as investors also believe that ECB monetary policy easing may have run its course for now.

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However, eurozone finance ministers are not planning any joint spending, while lead economy Germany has been dragging its feet about providing fiscal stimulus to its economy, which is on the brink of recession.

Uncertainty over the future of the ECB stimulus package announced on Sept 12 also continues, as Bundesbank head Jens Weidmann reaffirmed his opposition on Tuesday to relaxing the terms of the quantitative easing programme so that the ECB can buy even more government debt.

"He will leave the ECB at end of October and a lot of people will say to Draghi (that) he is the only ECB president who wasn't able to raise rates," said DZ Bank rates strategist Sebastian Fellechner.

Most 10-year government bond yields in the region were up 1 to 2 basis points, while Germany's 10-year benchmark yield edged up to -0.55 per cent, rising for a sixth session in a row.

Mr Fellechner added that the speeches could lead to eurozone states understanding the need for fiscal stimulus. He added that significant stimulus is more likely in 2020 than this year, and analysts say Germany may eventually have to boost spending if the economy worsens.

Finance Minister Olaf Scholz said that Germany would be able to counter an economic crisis if there were one, although he doesn't expect a downturn as bad as in 2008/2009.

Germany's leading economic institutes are on Wednesday expected to lower their growth forecasts for this year and the next .

US data is in focus after a closely watched manufacturing index dropped to its lowest level in a decade. ADP employment numbers will set the stage for non-farm payroll numbers on Friday.

Meanwhile, the first quote for the ECB's new benchmark rate ESTR was released at -0.549 per cent, 9.8 basis points below the last EONIA reading.

UK Prime Minister Boris Johnson will unveil his final Brexit offer to the European Union on Wednesday. REUTERS