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South European government bond yields rise as lockdown restrictions tighten

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, Nov 2 (Reuters) - Germany’s 10-year bond yield held near recent multi-month lows on Monday while peripheral euro zone sovereign debt yields nudged higher as new lockdown measures in Europe increased the demand for safer assets.

As COVID-19 cases surge across Europe, nationwide lockdowns have been announced in Britain, France and Germany, while Austria, Portugal, Spain and Italy are tightening restrictions.

Core euro zone bond yields were broadly steady, while riskier Italian yields rose by 2 to 3 basis points. Analysts said that the fallout of a worsening coronavirus situation and tighter lockdowns is limited by the expectation of more monetary stimulus.

Last week, peripheral yields fell when the European Central Bank gave a clear signal that it will provide more easing at its December meeting.

“European rates will remain pinned down by both central bank intervention, and by flight to quality flow. The stage is set for 10Y Bund yields grinding lower to -0.70%,” wrote ING rates strategists in a note to clients.

“We are more circumspect about sovereign spreads, the feel-good factor from the ECB committing to ease in December is real, but we are unsure it will last long,” they added.

Germany’s 10-year Bund was broadly flat on the day, at -0.623% at 0829 GMT, having hit its lowest since March last week.

Italy’s 10-year yield was up 3 bps at 0.744% at 0831 GMT , and the spread between Italian and German 10-year yields widened by 1.8 bps.

“Given a worsening health situation in Europe and North America, we continue to believe that governments will be required to further tighten restrictions on economic activity in order to prevent the spread of the coronavirus outbreak, and we anticipate further stimulus efforts by central banks (as indicated by the ECB on Thursday) to support the economy,” wrote RBC rates strategists in a note.

Also in focus are the U.S. elections on Tuesday, and the U.S. Federal Reserve meeting on Thursday.

Democrat challenger Joe Biden is ahead in opinion polls, and is expected to provide a big lift to the economy by passing a fiscal stimulus package.

The 2-year, 10-year Treasury curve is at its steepest since June, with a Biden win expected to steepen the curve further .

“Transatlantic spreads should widen as long as the Biden trade unfolds, as Bunds look better supported,” Commerzbank strategists wrote in a note. (Reporting by Elizabeth Howcroft; Editing by Giles Elgood)

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