July 10, 2020 / 10:48 AM / a month ago

UPDATE 2-German yields hit 6-1/2 week lows after record U.S. coronavirus infections

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds news and updates rates)

By Yoruk Bahceli and Joice Alves

London, July 10 (Reuters) - German 10-year bond yields dropped to 6-1/2 week lows on Friday as risk appetite was hit and global stocks fell following a surge in coronavirus infections.

More than 60,500 new COVID-19 infections were reported across the United States on Thursday, according to a Reuters tally, the largest one-day increase by any country since the pandemic first emerged.

“Confidence in risk assets cracked after previously holding up in the face of resurging Covid-19 counts and renewed lockdowns in some regions,” ING analysts told clients.

Safe-haven German 10-year bond yields briefly touched -0.49%, their lowest since May 25. They were last flat at -0.47% . Italian 10-year yields were up 1 basis point at 1.30% after rising as much as 3 bps earlier.

That pushed Italy’s risk premium - the yield it pays for 10-year debt on top of Germany - to as high as 178 basis points, a 1-1/2 week high.

“There’s limited upside (for Bunds) given how quickly we’ve rallied over the last day or so,” said Mizuho strategist Peter McCallum. Ten-year yields have fallen 6 basis points over the last three sessions.

There was little reaction to the chair of EU leaders, Charles Michel’s proposal offering concessions to EU countries over their long-term budget and economic stimulus plans, ahead of a national leaders’ meeting next week to discuss how to revive economies around the bloc.

German Finance Minister Olaf Scholz voiced optimism after Michel’s announcement.

Data showed that Italy’s industrial output rebounded much more strongly than expected in May, but the Bank of Italy lowered its 2020 economic forecast for the country to a 9.5% decline, deeper than the 9.2% fall it predicted last month.

Inflation expectations continued to fall, with a key long-term euro zone gauge falling to its lowest since June 22 at 1.07%

“That is more a function of the underlying rates markets rather than inflation expectations per se,” Mizuho’s McCallum said.

“We think that if inflation expectations are to fall off dramatically, that will mean the ECB will commit even more forcibly to their PEPP programme, so we wouldn’t read too much into that.”

Focus was also turning to the European Central Bank’s meeting next Thursday, where most analysts don’t expect a change to the bank’s monetary policy.

The European Central Bank’s emergency purchase envelope is likely to be used in full despite suggestions to the contrary recently by policymakers, MNI reported on Thursday citing sources, with some sceptical that purchases would be temporary. (Reporting by Yoruk Bahceli and Joice Alves; Editing by William Maclean, Susan Fenton and Hugh Lawson)

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