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EU borrowing costs tick higher despite signs of bond supply shortage

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Eurozone bond yields rose yesterday, tracking moves in US Treasuries after falling earlier in the session as the focus was on a debt supply shortage that has kept a lid on the bloc’s borrowing costs.

US Treasury yields steadied as investors weighed concerns about the growing rate of Covid-19 infections against new Treasury supply this week and the likely effects of the Federal Reserve reducing its bond purchases.

“I think US yields have room to rise to levels more consistent with the macro backdrop to around 1.7pc,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors. Analysts see bond scarcity in the euro area, as issuance falls while demand rises for safe assets to use as collateral. That has been seen as keeping bond yields contained while euro area swaps rates have risen relative to government bonds.

That contributed on Friday to a fall in bond yields even as money markets priced in two full rate hikes from the European Central Bank by the end of 2022.

The bloc’s government bonds, whose yields move inversely with their prices, were also likely supported by member states moving to implement lockdown measures to curb the spread of the coronavirus, with Germany the latest country to plan tighter curbs.

Jens Peter Sorensen, chief analyst at Danske Bank, said low issuance heading towards the end of the year was keeping bond yields in the bloc depressed as it is being outpaced by the European Central Bank’s bond purchases.

Mr Sorensen said benchmark issuer Germany was “especially mismatched”, as it would issue €16bn of bonds against €15.5bn of flows from maturing debt and €25-30bn of ECB purchases, keeping fresh supply for investors negative.

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