* Eurozone Periphery Government Bonds give tmsnrt.rs/2ii2Bqr (update prices and add new comment)
AMSTERDAM, Oct. 16 (Reuters) – The German 10-year bond yield was pegged for its biggest weekly drop since June, but markets stabilized near their seven-month lows on Friday after Thursday’s risk leak caused through measures to reduce coronavirus infections in Europe.
German safe-haven bond yields fell to their lowest levels since mid-March, when the coronavirus first spread globally. A rally that had pushed Italian bond yields to historically low levels has also ended.
As markets stabilized on Friday, Germany’s 10-year yield was down 1.4 basis points to -0.62%.
US President Donald Trump’s willingness to increase his bid for a coronavirus relief package to secure a deal with the House of Representatives helped risk sentiment during US negotiations on Thursday.
Still, German 10-year yields were pegged for their biggest weekly decline since the week ending June 12, down 9 basis points this week.
“The excess liquidity continues to support the bond market for the rest of the year, and with the possibility of a break in Brexit negotiations, rising infections, etc., then buying safe havens could continue in the short term, ”Jens Peter Sorensen, chief analyst at Danske Bank, told clients.
Italy’s southern European bond yields sell off on Friday came to a halt on Friday. Italy’s 10-year yield was last down 5.2bp to 0.64%, after hitting 0.635% earlier in the day, although it did not dip below the low historic 0.634% reached this week. Yields on other maturities of Italian debt also fell from 4 to 6 bps.
“If you were in the camp like us and you think there is a deterioration on the virus front, or that any strength in the euro leads to the likelihood of the ECB doing something in terms of easing,” then you would see that as a benefit to the peripherals, ”said Lyn Graham-Taylor, rate strategist at Rabobank.
“We would have tried to see yesterday as an opportunity to extend the (Italian debt).”
The risk premium Italy pays for 10-year debt relative to Germany was 126 basis points, down from two-week highs of 136 basis points reached on Thursday.
Analysts expect Thursday’s sale to be temporary, noting support for the European Central Bank’s pandemic emergency bond-buying program. Investors also expect more ECB stimulus by the end of the year, of which Italy is said to be one of the main beneficiaries.
“We don’t expect yesterday’s enlargement to gain momentum, precisely because of these supporting technical factors,” UniCredit analysts said.
A number of ECB Governing Council members spoke on Friday.
Bank of Italy Governor Ignazio Visco has said it is important to avoid early police withdrawals because pre-COVID conditions will not return.
Finland’s Olli Rehn said the ECB should follow the US Federal Reserve with a greater focus on welfare, even if that means inflation temporarily exceeds its target.
Irish central bank governor Gabriel Makhlouf said there had been no change in the macroeconomic environment since the last ECB meeting. (Reporting by Yoruk Bahceli; Additional reporting by Olga Cotaga; Editing by Catherine Evans)