Portugal 10-year bond yield nears 0% as periphery cheers brighter world sentiment

Italian and Portuguese bond yields hit fresh record lows on Wednesday, with Portugal's 10-year yield in striking distance of negative territory as upbeat sentiment globally provided another incentive to pile into Europe's lower rated bond markets. World shares rallied to a record peak after the formal start of U.S. President-elect Joe Biden's transition to the White House and on growing confidence surrounding COVID-19 vaccines.

For southern European bond markets, already well supported by aggressive European Central Bank stimulus, the rally in risk assets globally has provided an additional boost. Portugal's 10-year sovereign bond yield fell to a record low of 0.016%. Italy's 10-year bond yield also hit a new record low at 0.554% and Spanish yields were 1-2 basis points lower on the day.

"The here-and-now of the second COVID wave - exemplified again by yesterday's Ifo (survey) - and a very cautious central bank still cap the upside in yields," said Benjamin Schroeder, a senior rates strategist at ING. He was referring to Germany's Ifo business sentiment index, which fell for the second month in a row in November.

"The prospect of longer support should be a positive for bond spreads," Schroeder added. Yields on higher-rated bonds such as Germany's meanwhile fell after an initial rise.

While other safe-havens such as gold and the U.S. dollar have sold off in the face of the increased optimism, selling of bonds in Europe and the United States has been modest given central bank stimulus expectations. Germany's benchmark 10-year Bund yield briefly touched -0.546%, its highest in around a week but was last down 1.1 bps on the day at -0.58%.

The pandemic is expected to take a toll on growth long after a vaccine is rolled out, encouraging central banks to keep aggressive stimulus in place - a backdrop that lends itself to low bond yields. "There are generally three things that move bond markets - (economic) growth, inflation and change in policy rates," said Jim Caron, a fixed income portfolio manager at Morgan Stanley Investment Management.

"We know policy rates are not going to change anytime soon and people have been revising down growth and inflation forecasts because of the pandemic, so that's the main reason why bonds are supported."