UPDATE 2-Euro zone bond yields dip as concern grows over second COVID wave

25 Sep 2020 / 00:15 H.

    * Fed officials say will keep rates lower for longer

    * German yields dip towards 1-1/2 month low

    * Long term euro zone inflation expectations at 2-mnth low

    * Euro zone periphery govt bond yields (Updates prices, adds details)

    By Abhinav Ramnarayan

    LONDON, Sept 24 (Reuters) - High-grade euro zone government bond yields fell across the board on Thursday on bets that the European Central Bank will keep the stimulus taps flowing as worries grow over the economic impact of a second wave of COVID-19 infections.

    With a number of countries in Europe -- including Britain and Spain -- taking fresh measures to combat a renewed surge in coronavirus cases, policymakers around the world are expected to respond in kind.

    In the United States, Federal Reserve officials have doubled down on efforts to convince investors they will keep monetary policy easy for years to allow unemployment to fall, emphasising that interest rates will stay near zero.

    With a survey showing on Wednesday that the German services sector slipped back into contraction, bets are that European policymakers will similarly maintain a dovish stance.

    Containing the coronavirus must be a priority for policymakers as a surge in infections would damage consumer and investor confidence in the economy, the European Central Bank's chief economist Philip Lane said on Thursday.

    The baseline scenario in the bank's staff projections is that a medical solution is found over the course of the next year, he added.

    "There's clearly been a ramping up of dovish talk by some ECB speakers -- not everyone, but enough to generate some hope for more stimulus," said ING rates strategist Antoine Bouvet.

    "There's also some risk aversion at play, with the U.S. election coming up on top of the various lockdown measures being taken."

    That said, business morale in Germany and France improved for the fifth month in a row in September, boosting hopes that the euro zone's two biggest economies had enjoyed a solid recovery from the coronavirus shock.

    Germany's 10-year bond yield , the benchmark for the bloc, was down 1 basis point to -0.51% in late trade, not far from a 1-1/2 month low of -0.539% hit on Monday.

    Market expectations of long-term euro zone inflation dropped to its lowest level in two months at 1.1482%, well below the ECB's target of just below 2%.

    Focus was also on the European Central Bank's latest round of ultra-cheap, three-year Targeted Longer-Term Refinancing Operation (TLTRO) loans, which have flooded banks with abundant liquidity, pushing money market rates to record lows.

    Euro zone banks borrowed 174.5 billion euros at the latest allotment, the ECB said on Thursday, above what many analysts expected.

    Also on Thursday, Italy sold 750 million euros of 10-year inflation-linked bonds on strong demand. (Reporting by Abhinav Ramnarayan; Additional reporting by Yoruk Bahceli; Editing by Catherine Evans)

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