REFILE-UPDATE 1-Italy's five-year bond yield turns negative in U.S. election aftermath

(Refiles with correct chart, fixes typos in para 11, 12)

* Euro zone periphery govt bond yields

AMSTERDAM, Nov 5 (Reuters) – Italy’s five-year bond yield turned negative on Thursday for the first time, as bets that a potential gridlock resulting from the U.S. election supported riskier financial assets.

Democrat Joe Biden edged closer to victory in the U.S. presidential race on Thursday. But Democrats were falling short of expectations in Congressional elections, with the Senate looking likely to stay in Republican hands.

That prompted investors to unwind bets on a big new stimulus package on Wednesday, and on Thursday stock markets rose on expectations gridlock would make major policy changes unlikely.

Moves on safe-haven German bond yields continued to be less pronounced than on U.S. Treasuries. Germany’s 10-year yield was unchanged on the day at -0.64% as 10-year Treasury yields dropped 3 basis points..

The outperformance of U.S. Treasuries pushed the gap between 10-year U.S. and German yields to tighten further on Thursday, to its lowest in over a week, at around 138 basis points.

“European bond yields don’t seem to be moving very much compared to U.S. bond markets, they’re sort of de-linked, which is interesting,” said John Vail, chief global strategist at Nikko Asset Management in Tokyo.

“It could just be that the ECB has such a massive control over them that they are not as sensitive. They’ve been gradually losing sensitivity, I’d say, over the last few months, especially since the ECB got really busy again.”

Lower-rated southern European bonds, which rallied together with Bunds and Treasuries on Wednesday, continued to benefit on Thursday, even as the rally in the latter slowed.

Italy’s five-year yield turned negative for the first time, and its 10-year yield also fell to a record low at 0.607%. The yield gap with German 10-year bonds dropped to 125 basis points, its lowest in a week and a half.

Support from the European Central Bank, which committed last week to providing additional stimulus in December, has pushed southern European bond yields to record lows despite the recent surge in coronavirus cases.

“If there is a risk in the world that means that interest rates stay lower for longer, that doesn’t increase the risk of the euro (area) breaking up, then (Italian bonds) are a higher-yielding way of making some money as well as being safe,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

The European Union edged towards finalising its next budget and 800 billion-euro coronvirus recovery fund — a key driver of low southern European bond yields — on Thursday, but the European Parliament and EU countries still have to approve the agreement.

Source: Read Full Article