Dec 2 (Reuters) - Euro zone government bond yields were broadly unchanged on Thursday as the new Omicron coronavirus variant dampened risk sentiment, offsetting expectations of faster U.S. monetary policy tightening.
A recovery in stock markets overnight was wiped out after United States identified its first known COVID case caused by the Omicron variant, discovered in a fully vaccinated patient who had travelled to South Africa.
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 U.S. Senate Banking Committee that Fed policymakers would discuss at their Dec. 14-15 meeting whether to end their bond-buying program a few months earlier than had been anticipated.
Germany’s 10-year government bond yield , the benchmark of the bloc, fell 0.5 basis points to -0.336%.
U.S. borrowing costs rose in early London trade, with the 10-year yield up 1.5 basis points at 1.45%.
“Bunds remain headline-driven in line with swings in risk sentiment on mixed Omicron headlines,” Commerzbank analysts said in a note to customers mentioning the first confirmed case in U.S. 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 unchanged at -0.034, after hitting a fresh low since August at -0.054%.
“At first reading, a delay (in ECB decision on its bond-buying programme) may be seen as dovish, but it is a two-edged sword. It extends a period of uncertainty and, alongside it, volatility,” ING analysts added.
Sources said that a growing number of European Central Bank governors are considering delaying part of a decision on the ECB's stimulus plans as the outlook has been muddied by the new coronavirus variant and mounting price pressures.
Italy’s 10-year bond yield was flat at 1.025%, with the closely-watched spread between 10-year Italian and German yields close to its widest since November 2020 at around 135 basis points.
“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.
Reporting by Stefano Rebaudo, editing by Kim Coghill