German bond yields at seven-month lows as Covid-19 cases surge

German government bond yields fell to seven-month lows yesterday as rising coronavirus cases in Europe raised concern about further lockdowns that would deal another blow to the struggling eurozone economy.

France imposed curfews while other European nations are closing schools, cancelling surgeries and enlisting student medics as overwhelmed authorities face the nightmare scenario of a Covid-19 resurgence at the onset of winter.

In the United Kingdom, tighter Covid-19 lockdowns were expected to be imposed on London and northern England by Prime Minister Boris Johnson’s government later yesterday.

“The prospect of more localised lockdowns would hurt economic activity when they are already struggling and that is weighing on the bond markets,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management. Yields on perceived safe-haven German government bonds for 10-year maturities fell more than 5 bps to -0.627%, the lowest since mid-March.

Yields have fallen nearly 10 bps this week. The rally in core European government debt spread to other bond markets like France and Belgium where yields also fell to their lowest levels since March as authorities prepare to lock down parts of their economies.

Even before the latest round of restrictions, data this week showed the European economy was losing steam by the end of the third quarter. Germany will recover more slowly from the coronavirus pandemic than originally predicted, its leading economic research institutes forecast on Wednesday, while the eurozone’s industrial production reading for August slowed sharply. While new infections in emerging markets are starting to edge down, they have risen in advanced economies – developed markets now account for about 30% of new cases, compared to 25% a month ago, Capital Economics said. Italy, Croatia, Slovenia and Bosnia reported record figures of new daily infections.

The risk-off mood in global bond markets reverberated widely with a rally in peripheral European government debt markets including Italy stalling yesterday as investors took profits.

Italian 10-year bond yields were trading at 0.70% after falling to a record-low 0.634% on Wednesday. That yanked the spread between German and Italian bonds wider, to more than 130 bps yesterday from 119 bps in the previous session. Spanish yields also firmed as the government said it would issue debt to compensate for any potential delay in the approval and disbursement of EU rescue funds.

Elsewhere, US Treasury yields dived to a two-week low of 0.6960% as the prospects of fresh US stimulus before the November 3 presidential election faded. Downbeat comments from US Treasury Secretary Steven Mnuchin that a stimulus deal was unlikely before the vote provided one of several reasons for profit-taking.

“Data today is expected to confirm US economic sentiment is deteriorating, US fiscal stimulus remains some way off and a hard Brexit remains likely,” Mizuho strategists said.