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German yields have their best day in a month as…

By Abhinav Ramnarayan

LONDON, Aug 11 – German government bond yields rose to a two-week high on Tuesday, a move tracked by other high-rated euro zone bonds, after a survey showed investors were more optimistic about the trajectory of the European economy than before.

Investor sentiment in Germany picked up more than expected in August, a survey by the ZEW Institute showed, reflecting hopes that Europe’s biggest economy is recovering after the coronavirus pandemic.

Germany’s 10-year Bund yield rose more than five basis points to a two-week high of -0.463%, a move mirrored by debt of other high-grade countries such as The Netherlands and France. ,

The last time the Bund yield posted such a large daily jump was July 13, when bonds sold off as stocks hit five-month highs.

“The air below the -0.50% level (on German 10-year Bunds) was getting thinner and so hopes for improved economic outlook is pushing yields higher,” said Commerzbank rates strategist Rainer Guntermann. “Stock markets hitting new highs are also contributing.”

U.S. stocks rose, with the S&P 500 heading towards pre-pandemic highs as ultra-low interest rates and trillion dollar stimulus, along with a better-than-feared earnings season, helped Wall Street recover.

But Guntermann warned that worries around COVID-19 infection numbers and geopolitical issues remain.

Earlier, southern European government bond yields dropped to new lows amid the promise of fiscal stimulus in the United States, unprecedented central bank support and a European Union recovery fund.

In early trading, Spain’s 10-year government bond yield dropped to 0.254%, its lowest since early March. The equivalent Portuguese bond yield fell to 0.278%, also its lowest since early March.

But by 1452 GMT they had reversed course and were up 2-3 bps on the day.

In the absence of significant data releases or Europe-related headlines, the recently agreed European recovery fund has encouraged investors to keep buying this kind of debt, said Mizuho rates strategist Peter Chatwell.

“That was a watershed moment. Investors can now look at all European government bonds as being much more similar as it is more likely that stronger economies will be able to support the weaker ones in a crisis via the recovery fund,” he said.

The central bank liquidity flooding the system is also pushing spreads tighter. Chatwell pointed to the difference between three-month Euribor and the Euro Overnight Index Average, which has gone negative for the first time since early March.

(Reporting by Abhinav Ramnarayan; editing by Susan Fenton, Larry King, Kirsten Donovan)

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