LONDON, Nov 29 (Reuters) - The euro zone government bond
rally abated on Monday, with yields rising slightly as investors
dropped out of panic mode and looked to assess the impact of the
Omicron coronavirus variant on global economies.
The variant has been found in a growing list of countries,
prompting many to impose fresh travel restrictions.
Yet markets have calmed since Friday's risk-off bond rally
and investors are now scrutinising scientists' assessment of the
efficacy of vaccines against the variant and trying to assess
how potential measures to contain its spread could affect
economies and policy.
"We now face a period of uncertainty as to the efficacy of
existing vaccines, and getting more clarity on this may take a
couple of weeks at best," said Peter Chatwell, head of rates at
Mizuho believes that a set of light lockdowns is the most
likely scenario. However, the presence of a large downside
scenario means that investors and central bankers will need to
make downward revisions to growth forecasts, Chatwell said.
Having dropped substantially on Friday, Germany's 10-year
Bund yield was up 2 basis points (bps) at -0.314% in late Monday
This is still 10 bps below last week's highs and close to a
two-month low of -0.356% hit on Nov. 22.
Other high-grade euro zone government bond yields were also
up about 2-3 bps on the day.,
Expectations for higher interest rates have been pushed back
since news of the Omicron variant broke, with money market
participants no longer expecting an increase in the ECB deposit
rate in 2022.
Long-term inflation expectations in the single currency bloc
have fallen back substantially to 1.81%, according to a key
market gauge, compared with 2.09% in October.
On Tuesday, Italy is due to sell 4.25 billion euros ($4.8
billion) of five-year and 10-year bonds to kick off a busy week
of European government bond supply, potentially exerting some
upward pressure on yields as investors sell to make space for
the new debt.
($1 = 0.8857 euros)
(Reporting by Abhinav Ramnarayan
Editing by Kirsten Donovan and David Goodman)