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German Yields Steady, ECB Easing Offsets U.S. Stimulus

German government bond yields held steady on Wednesday, as expectations of fresh easing measures by the ECB offset a boost in risk sentiment triggered by hopes of quick approval of a coronavirus stimulus plan in the United States.

U.S. President Donald Trump will sign coronavirus legislation proposed by Republican Senate Majority leader Mitch McConnell, Treasury Secretary Steven Mnuchin said on Wednesday, if the proposal passes the U.S. Congress.

U.S. Treasury yields surged on Tuesday, propelled by the first signs of a new push in Congress to send federal aid to businesses and state and local governments hit by the pandemic.

“Yesterday’s price action is a reminder of how a U.S. Treasuries sell-off could tighten financing conditions for Europe,” Citi said in a note to clients.

“PEPP is likely to respond to cap euro yields, but it is worth remembering that ECB Quantitative Easing normally breaks over year-end, perhaps opening up a small window of vulnerability,” it added, referring to the central bank’s Pandemic Emergency Purchase Programme.

German 10-year government bond yields briefly touched a new near three-week high as Treasury yields continued to rise on Wednesday.

Italian yields fell after rising on Tuesday, with the 10-year BTP yield last down 4 basis points to 0.60%.

The European Central Bank will look at more than its two hallmark instruments - emergency bond purchases and cheap loans - to support an economy that faces permanent damage from the coronavirus pandemic, chief economist Philip Lane told Reuters on Wednesday.

Lane is being closely watched as the euro/dollar exchange rate is currently around 1.2. Commerzbank noted that is the level at which the ECB verbally intervened to say the euro exchange rate “does matter” for monetary policy at the beginning of September.

However, “a replay seems unlikely though, as rate cuts, the prime tool in this contingency, are not ‘en vogue’ at present,” Commerzbank added.

“Bunds seem vulnerable as the euro is unlikely to trigger a Lane intervention similar to September.”

The spread between U.S. Treasuries and Bund yields widened further on Wednesday to around 148 basis points.

Unicredit said the widening has been triggered by hopes of new U.S. stimulus, although it does not expect stimulus to be approved before the end of February.

Although Unicredit expects a correction of the U.S.-German spread widening in the near term, it eventually sees it hitting 160 basis points. It expects U.S. GDP to return to pre-COVID-19 levels faster than euro zone GDP, while the Fed’s quantitative easing would likely be less supportive of U.S. Treasuries than the ECB’s QE would be for Bunds.

Reporting by Stefano Rebaudo in Milan Additional reporting by Yoruk Bahceli in Amsterdam Editing by Kirsten Donovan and Matthew Lewis

Source: Reuters

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