German Bund yield touches 2-month high as vaccine hopes dent safe-havens

Germany's 10-year government bond yield rose to a two-month high on Wednesday as this week's positive news on a COVID-19 vaccine continued to boost expectations for a brighter economic outlook and weighed on demand for safe-haven debt. European Central Bank President Christine Lagarde is expected to speak at an ECB forum on central banking later in the day. Her comments are not expected to alter expectations for further stimulus at the ECB's December meeting.

The general risk-on sentiment in financial markets following news on Monday that Pfizer's experimental COVID-19 vaccine is more than 90% effective based on initial trial results continued to drive bonds. While still early days, the vaccine could be a potential game-changer for a world economy hit hard by the coronavirus. That prospect hurt German bonds, considered one of the safest assets in the world.

"Even though logistical issues remain, and there is uncertainty around the data, the fact that we now look likely to have (potentially multiple) successful vaccines – should be enough in of itself for markets to look forward to restriction removal," said Ross Hutchison, a rates fund manager at Aberdeen Standard Investments. "However, my view is that both the damage done from the virus and restrictions, combined with the higher aggregate indebtedness will mean yields will need to remain historically low for the foreseeable future."

The 10-year German Bund yield rose to -0.456%, its highest level in two months. It has risen 13 basis points this week, set for its biggest weekly jump since early June. This has left the German bond yield curve as measured by the gap between 2- and 10-year yields at around 22 bps and near its steepest levels since early September.

News on Tuesday that EU negotiators have agreed details of the 2021-2027 EU budget, a crucial step for the activation of the bloc's 1.8 trillion euro recovery package, added to the upbeat mood in markets that weighed on bonds, analysts said. Overall trade on Wednesday was subdued with U.S. debt markets closed for Veterans Day. Italian bonds recovered some ground from this week's selling with 10-year yields last down 1.5 bps on the day at 0.71% , still some 14 bps above record lows hit briefly on Monday.

Analysts say room for further selling in euro zone bond markets is limited given expectations for further ECB stimulus and a still weak inflation outlook. "The scope for a further rise in yields is limited by a couple of factors. One is policy - we don't expect a central bank response to better growth conditions until inflation rises," said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.