German Bund yield falls to lowest since Sept, inflation tempers bullishness

BY Reuters | TREASURY | 11/30/21 05:21 AM EST

* Bund yields fall to -0.363

* US Treasury yields down roughly 10 bps

* Euro zone inflation hits record high (Updates prices, adds Powell comments)

By Dhara Ranasinghe

LONDON, Nov 30 (Reuters) - Germany's 10-year bond yield fell to its lowest level in almost three months on Tuesday, as warnings about the impact of the Omicron coronavirus variant overshadowed forecast-beating inflation readings in the bloc.

Drugmaker Moderna's CEO said COVID-19 vaccines were unlikely to be as effective against Omicron as they have been against the Delta version, sparking a new selloff in world stocks.

Earlier in the day, prepared remarks from U.S. Federal Reserve chief Jerome Powell, released before his Congressional testimony, had also encouraged investors to snap up bonds as he suggested the Omicron variant could imperil economic recovery.

That had taken 10-year Treasury yields to two-month lows around 1.4120, but by 1525 GMT they rose back above 1.46% . They pared gains after Powell's speech in which he suggested it might be appropriate to wrap up stimulus tapering earlier.

The yield on 10-year German Bunds -- regarded as one of the safest assets in the world -- fell to its lowest since September at -0.363% before pulling back slightly. By 1525 GMT it was down two bps around -0.344%.

It is down roughly 25 bps in November and set for one of its biggest monthly falls of the past two years.

"You have this new variant and no one is sure about the severity of the illness," said Lyn Graham-Taylor, senior rates strategist at Rabobank in London.

"The flip side is that if it turns out not be as bad as feared, then we get a big risk on move. So we are in this phase where there will be choppiness until we get more clarity."

Bank of Spain governor Pablo Hernandez De Cos warned that inflation and COVID-19 could force a slight downward revision of growth forecasts in the fourth quarter and early 2022.

Government bond yields in Spain and other euro zone countries inched one to two bps lower

Investors continued to push back rate hike bets. They priced out a July 25 bps Fed rate hike, pushing it to September 2022 and no longer expect a full European Central Bank move next December.

Yields also moved off their lows after euro zone inflation data which showed consumer price growth in the 19-nation bloc accelerating to 4.9% in November, the highest level in the 25 years since the figure has been compiled. It's up from 4.1% a month earlier and ahead of expectations for 4.5%.

"It's quite likely that some of these higher inflation prints do feed through to second-round effects," Gareth Colesmith, head of global rates and macro research at Insight Investment, told a markets forum on Tuesday, referring to rising inflation among major economies.

While some ECB policymakers have warned that high inflation, even if temporary, could trigger a surge in wages, ECB President Christine Lagarde and chief economist Philip Lane have dismissed this argument, saying that wage growth remains anaemic.

(Reporting by Dhara Ranasinghe; Additional reporting by Sujata Rao; Editing by Ed Osmond, David Evans and Emelia Sithole-Matarise)

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.

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