Eurozone government bond yields fall on Omicron worries

[LONDON] Eurozone government bond yields fell on Thursday (Dec 2) after a choppy start as the new Omicron coronavirus variant dampened risk sentiment, outweighing the impact of expectations for faster US monetary policy tightening.

European shares dropped after a recovery in stock markets overnight was wiped out when United States identified its first known Covid-19 case caused by the Omicron variant, in a fully vaccinated patient.

Federal Reserve chair Jerome Powell reiterated on Wednesday that policymakers need to be ready to respond to the possibility that inflation may not recede in the second half of next year as expected.

On Tuesday, Powell told the US Senate Banking Committee that Fed policymakers would discuss at their Dec 14-15 meeting whether to end their bond-buying programme a few months earlier than had been anticipated.

Germany's 10-year government bond yield, the benchmark of the bloc, fell 2 basis points to -0.354 per cent.

US borrowing costs rose in early London trade, with the 10-year Treasury yield up 0.5 basis points (bps) at 1.44 per cent, while shorter maturities between 5 and 2 years rose by 3-4 bps.

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"Bunds remain headline-driven in line with swings in risk sentiment on mixed Omicron headlines," Commerzbank analysts said in a note to clients mentioning the first confirmed case in the US following reassuring WHO comments on mild symptoms.

"Even as the case for a faster taper is growing stronger with every bit of economic data, the long end of yield curves remain at the whim of Omicron newsflow," ING analysts said.

Germany's 30-year government bond yield was down one bp at -0.05 per cent, after hitting a fresh low since August of -0.056 per cent.

Italy's 10-year bond yield fell 4 bps to 0.98 per cent, with the closely-watched spread between 10-year Italian and German yields tightening to around 132 bps.

"Italian bond prices are now outperforming after underperforming core and semi-core bonds in the last few days,"Rene Albrecht, strategist at DZ Bank, said.

ING's analysts said that if the European Central Bank (ECB) were to delay a decision on its bond buying programme, it could initially be seen as dovish.

"But it is a two-edged sword. It extends a period of uncertainty and, alongside it, volatility," they said, mentioning a potential negative impact on Italian bonds in the medium term.

Sources said that a growing number of ECB governors are considering delaying part of a decision on the central bank's stimulus plans as the outlook has been muddied by the new coronavirus variant and mounting price pressures.

"The bottom line of the latest story is that the ECB is likely to decide that PEPP (Pandemic Emergency Purchase Programme) will end in March while possibly keeping the flexibility of the unused part of the envelope beyond March," Commerzbank analysts argued.

REUTERS