New virus strain fears set Bund yields for biggest daily drop in two weeks

Amsterdam

SAFE-HAVEN German bond yields dropped on Monday as a new strain of the novel coronavirus in Britain and lack of progress on sealing a Brexit deal hurt risk appetite, boosting demand for safe-haven assets.

Several countries placed travel restrictions to and from the United Kingdom on Sunday due to concern over the new strain that is spreading rapidly there. Britain and the European Union were unable to reach a deal by a Sunday deadline set by the European Parliament, with negotiations expected to continue on Monday.

The news boosted safe-haven assets such as the US dollar and government bonds, while European stocks were set to open lower.

German 10-year yields were down four basis points in early trade to -0.61 per cent, on track for their biggest daily drop in two weeks. Other higher-rated eurozone government bond yields dropped similarly.

"I think everyone is really fearing a much-quicker spread of the coronavirus, so this is weighing on the markets," said Rene Albrecht, rates strategist at DZ Bank in Frankfurt. The new strain has already been identified in the Netherlands and Italy.He said the virus mutation came as a reminder that vaccines would not change life under Covid-19 very quickly.

Successful vaccine trial results from a number of drugmakers have boosted risk assets globally in recent weeks, supporting investor bets on reflation trades.

Mr Albrecht noted that German 10-year yields have retraced most of their rise since Pfizer first announced its Covid-19 vaccine was highly effective. That had pushed the yield as high as -0.46 per cent by Nov 11 from a low of -0.64 per cent on Nov 9 prior to the news.

On Monday, riskier Southern European yields were down one to two basis points. The relative underperformance of Italian bonds against Germany pushed the closely watched gap between their 10-year yields - the risk premium on Italian debt - to around 113 basis points, its highest in a week.

"With no flow support from the European Central Bank (ECB) as purchases pause, peripherals look vulnerable with investors possibly preferring to secure performance ahead of year-end and the market preparing for the usual supply wave in January," Commerzbank rates strategist Rainer Guntermann told clients.

The ECB's bond buying - the key factor holding down borrowing costs in southern European countries - has stopped from Monday until Dec 29 as market liquidity drops sharply around the Christmas holidays. REUTERS