Looming Lockdowns Threaten Taper, Sink Eurozone Bonds

The looming return of lockdowns to contain Europe’s latest wave of Covid-19 cases poses risk on economic recovery and postponement of the timetable for the ECB’s wind down of emergency stimulus.

Euro zone bond yields dropped on Friday and Germany’s entire yield curve fell into negative territory for the first time since August after Austria announced it would become the first country in western Europe to re-impose a full COVID-19 lockdown. The market concerns were worsened by speculation Germany could follow soon.

Germany’s coronavirus situation is so grave that a lockdown, including for people who have been vaccinated, cannot be ruled out, Health Minister Jens Spahn said on Friday.

Germany’s 10-year yield , the benchmark for the euro area, at one stage fell to -0.344%, a drop of about 6 basis points, reversing early-session rises. Later on the day, it was settling at -0.333%.

Germany’s 30-year yield, which had risen as high as 0.4% in mid-October turned negative during part of the session for the first time since August. It made its way back to 0.02% in late afternoon trading.

The two-year yield dropped to the lowest since early August at -0.787%. Elsewhere in Europe, other 10-year yields were 4-5 basis points lower. A total lockdown for Germany would be extremely bad news for economic recovery.