UPDATE 1-Brighter mood in world markets but euro zone debt holds ground

Market trading boards are seen at the Australian Securities Exchange in Sydney, Friday, February 9, 2018. ( AAP Image/Ben Rushton) NO ARCHIVING

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout)

LONDON, Oct 6 (Reuters) – Government bond yields across the euro area were broadly steady on Tuesday as dovish comments from the European Central Bank chief were offset by a brighter tone in world markets that weighed on safe-haven debt.

ECB President Christine Lagarde said a second wave of the coronavirus pandemic risks delaying the euro zone’s economic recovery.

Her remarks appeared to reinforce an expectation in bond markets that more ECB stimulus is likely in the months ahead, especially given that euro zone inflation fell deeper into negative territory last month.

Germany’s benchmark 10-year bond yield was steady on the day at around -0.51%. It is up more than 5 basis points from two-month lows hit last week.

“They (Lagarde’s comments) are dovish comments but keeping in line with the main themes in markets in recent weeks,” said Antoine Bouvet, senior rates strategist at ING.

“More monetary stimulus is priced in to a large extent, inflation is disappointing, the economic outlook is weak and that is pinning bond yields down.”

News that U.S. President Donald Trump was discharged from hospital following treatment for COVID-19 and prospects for a fresh U.S. stimulus package boosted sentiment in world markets, putting upward pressure on bond yields.

But the selloff in U.S. bond markets has been far more pronounced than in Europe.

On Monday, U.S. 10-year bond yields rose almost 7 bps in their biggest one-day jump in around a month — pushing the gap with German Bund yields to its widest since March.

“The market has (some) faith that the Fed can overshoot its 2% inflation target and almost no faith in the ECB’s ability to get close to it,” analysts at Societe Generale said in a note.

The five-year, five-year break even inflation forward, a key market gauge of long-term inflation expectations in the euro area, fell on Tuesday to its lowest level since July just below 1.13%.

Most other euro zone bond yields were steady. Italy’s 10-year bond yield nudged off recent lows to stand at 0.81% .

Data on Monday showed the ECB bought less Italian and Spanish government debt in the past two months as market pressure on both indebted countries stayed low, despite a resurgence of COVID-19 cases.

The ECB bond-buying numbers appeared to have little impact on peripheral debt markets, which have been supported in recent weeks by expectations for more ECB stimulus by year-end.

“The PEPP (Pandemic Emergency Purchase Programme) details for the August/September period highlight that the ECB is no longer in acute crisis mode,” said Commerzbank rates strategist Michael Leister.

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