* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds analyst comment, background)
MILAN, July 19 (Reuters) – Euro zone government bond yields fell on Monday ahead of Thursday’s policy meeting of the European Central Bank (ECB), while concerns about the Delta variant of the coronavirus curbed the appetite for risk.
In self-isolation after Britain’s health minister tested positive with the virus, Prime Minister Boris Johnson ended more than a year of restrictions in England and put his faith in vaccines. Meanwhile, Australia and some Asian countries extended restrictions.
ECB policymakers are set for a showdown as they chart a new policy path amid disagreements on how much more stimulus, mainly in bond purchases, is needed.
Germany’s 10-year bond yield was down 2 basis points, after hitting a fresh lowest since March 26 at -0.376%.
German 10-year real yield fell 0.5 bps, after setting its lowest since August 2019 at -1.686%.
The borrowing cost of the European Union bond issued in June was down 1.5 basis points, hitting an all-time low at -0.119%.
The phase-out of the Pandemic Emergency Purchase Programme (PEPP), which will end in March 2022, and possible changes in the Asset Purchase Programme (APP) were expected to hold the centre stage in the next few days and probably weeks.
“ECB President (Christine) Lagarde’s remark that the PEPP unwind may be followed by a transition into a new format is already causing speculation to run wild in some quarters ahead of the Thursday meeting,” DZ Bank analysts said.
Italy’s bonds – which might underperform core-bonds if the ECB reduces the flexibility of its purchases when the PEPP is over – came under selling pressure, with the 10-year bond yield rising 2 basis points to 0.72%, after briefly hitting a fresh low since April at 0.695%.
Greece’s 10-year bond yield was flat.
“EMU spreads will, however, be sensitive to any updates (by the ECB) on asset purchases as net supply looms large in Q1 (2022),” analysts at Citi said.
Most analysts, however, did not expect many changes at Thursday’s policy meeting.
“While further sources stories could become a factor as they would probably be more skewed to the hawkish side, the potential for setbacks appears limited with surveys suggesting relatively subdued expectations for tangible changes,” Commerzbank analysts told clients, referring to the ECB meeting.
Deutsche Bank economists expected “some changes to forward guidance and communications around the new average inflation targeting unveiled earlier this month”.
Dovish comments by the Federal Reserve will cap U.S. Treasury borrowing costs, in the short term.
The U.S. 10-year Treasury yield was down 3.5 basis points after falling to its lowest since mid-February at 1.248% on worries about the pandemic.
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