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Euro zone bond rally eases as Omicron assessment begins

11/29/2021 | 07:02am EST

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.

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 trading.

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)

ę Reuters 2021
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