Euro zone bond yields edge higher but economic recovery concerns persist

BY Reuters | ECONOMIC | 09/18/20 03:43 AM EDT

By Stefano Rebaudo

MILAN, Sept 18 (Reuters) - Euro zone government bond yields edged up after Thursday?s fall as stocks pared losses overnight signalling some risk-appetite, but persistent concerns about economic recovery as well as a lower-for-longer interest rates scenario underpinned prices.

The Bank of England (BoE) comments about a possible cut in interest rates below zero fuelled a rally in Gilts on Thursday and supported the eurozone bonds.

But the rally was short-lived with safe-haven German 10-year bond yields rising 1 basis point at -0.479% in early trade. Italian 10-year yields were up 1.3 basis points at 0.969%.

?BoE's ?structured engagement? with bank regulators on negative rates is fuelling rate cut speculation, ensuring that Bund dips continue to be bought and allowing 10-year yields to push through the -0.50% level,? a Commerzbank note said.

The U.S. Federal Reserve on Wednesday promised to keep rates near zero until inflation is on track to "modestly exceed" its 2% target, prompting analysts forecast that the U.S. central bank would to stick to this policy until the end 2023.

Poor economic data from the United States on Thursday further added to worries about the global economic recovery. The number of Americans filing new claims for unemployment benefits fell less than expected, suggesting the labor market shifted into low gear amid fading fiscal stimulus.

Focus remained on central banks after dovish ECB speakers nuanced the bank's unexpectedly sanguine policy message last week that took markets by surprise given the bloc's negative inflation reading in August and the appreciation of the euro.

Investors were shrugging off regional elections and a constitutional referendum in Italy due on September 20-21 as they do not expect risks of political instability after the vote.

?The upcoming elections look inconsequential for BTPs. For 10yr BTP-Bunds, we now believe an average of 150bp can hold for much of 2021. A Citi research note said forecasting a 125-175 range in the near future,? a Citi research note said. (Reporting by Stefano Rebaudo; Editing by Shri Navaratnam)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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