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Europe, News

Portugal 10-year bond yield nears 0% as periphery cheers brighter sentiment

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe

LONDON, Nov 25 (Reuters) – Italian and Portuguese bond yields hit fresh record lows on Wednesday, with Portugal’s 10-year yield in striking distance of negative territory as upbeat sentiment globally provided another incentive to pile into Europe’s lower rated bond markets.

World shares rallied to a record peak after the formal start of U.S. President-elect Joe Biden’s transition to the White House and on growing confidence surrounding COVID-19 vaccines.

For southern European bond markets, already supported aggressively the European Central Bank’s bond buying programmes and expectations that it will add further stimulus in December, the rally in risk assets globally has provided an additional boost.

Portugal’s 10-year sovereign bond yield fell to a record low of 0.016%. Italy’s 10-year bond yield also hit a new record low at 0.554% with the spread over benchmark German Bund yields close to its tightest since early 2018.

“If you put this into a theme, the market is faced with a J curve – where renewed restrictions mean elevated downside risk for activity in the short-term and central bank support but the long-term outlook is one of optimism based on a vaccine-driven recovery,” said Richard McGuire, head of rates strategy at Rabobank in London.

“For risky assets like the periphery both are good.”

Spain’s 10-year bond yield fell in line with its periphery peers, touching 0.054% — its lowest in more than a year.

Yields on higher-rated bonds such as Germany’s meanwhile fell after an initial rise.

While other safe-havens such as gold and the U.S. dollar have sold off in the face of the increased optimism, selling of bonds in Europe and the United States has been modest given central bank stimulus expectations.

Germany’s benchmark 10-year Bund yield briefly touched -0.546%, its highest in around a week but was last down 1 bps on the day at -0.57%.

The pandemic is expected to take a toll on growth long after a vaccine is rolled out, encouraging central banks to keep aggressive stimulus in place – a backdrop that lends itself to low bond yields.

“There are generally three things that move bond markets – (economic) growth, inflation and a change in policy rates,” said Jim Caron, a fixed income portfolio manager at Morgan Stanley Investment Management.

“We know policy rates are not going to change anytime soon and people have been revising down growth and inflation forecasts because of the pandemic, so that’s the main reason why bonds are supported.”

Elsewhere, Britain said it would borrow almost 400 billion pounds this year to pay for the massive coronavirus hit to its economy. UK gilt yields were broadly lower.

(Reporting by Dhara Ranasinghe Editing by Elaine Hardcastle and Gareth Jones and Kirsten Donovan)


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