The coronavirus resurgence and expectations for additional stimulus from the European Central Bank have strengthened the demand for the safe-haven German bonds, pushing the yields to multi-month lows.
According to Reuters, the 10-year yield hit a low of 0.646% on Wednesday, the lowest since mid-March. Meanwhile, the spread between the Italian and German 10-year bond yields, or the risk premium on Italian debt, widened to 139 basis points, the highest since Sept. 30.
Investors are moving out of risk assets and into safe-haven German bonds on fears that France and Germany’s new lockdown restrictions to contain the second wave of the coronavirus would derail the fragile economic recovery.
Also, expectations that the ECB would set the stage for additional December stimulus at Thursday’s rate review look to be weighing over yields. Earlier this month, Goldman Sachs said that the central bank could boost its pandemic bond-buying program by 400 billion euros ($470 billion) in December to counter deflationary pressures.
The situation has only worsened since then, and the ECB may feel pressured to deliver a bigger stimulus. The central bank is expected to keep rates and policy tools unchanged on Thursday, but set the stage for a December move.
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