* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds details, updates prices)
July 20 (Reuters) – German bond yields on Tuesday fell to their lowest since February, pushing the entire German yield curve to the brink of turning negative as investors continued to snap up government bonds.
Fears around the Delta variant of the coronavirus and the continuation of position adjustments into bonds pushed both German and U.S. Treasury yields on Monday to their lowest since February, analysts said, with a 10-basis point drop in benchmark 10-year U.S. Treasury yields – the best daily performance since February – leading the way.
The bond rally continued on Tuesday even as stock markets rose following their worst session of the year in Europe on Monday.
After relatively contained moves at the start of the session, bond yields in the euro area fell sharply alongside European peers outside the single currency bloc and outperformed U.S. Treasuries, where yields initially rose then fell. Bond yields move inversely with prices.
Germany’s 10-year yield, the benchmark for the euro area, fell to -0.427%, the lowest since early February, and was down 3 basis points by 1130 GMT.
30-year yields led the way, dropping 4 basis points to 0.04%. They are approaching sub-zero levels for the first time since February. A move below zero would push the entire German yield curve into negative territory.
The euro area real yield, which strips out the impact of expected inflation, as measured by swaps, fell to a new record low below -1.55%.
“It’s not a risk story,” said Peter McCallum, rates strategist at Mizuho, noting the rise in European stocks and the tightening of credit spreads on Tuesday.
“The risk-off in equities hasn’t actually been that dramatic as to cause this kind of move. So that’s when you think there’s something else and it does make sense that people taking off (short) positions is part of it,” he added, pointing to sudden falls in bond yields in the last two sessions.
Such sharp moves often happen when stop loss orders – to buy or sell bonds when a certain level is breached – are triggered.
Italian government bond yields fell nearly 2 bps to 0.678%, their lowest since April, but as they underperformed German bonds, the closely watched gap with German 10-year yields rose over 110 bps for the first time since July 8.
Five-year yields were close to turning negative for the first time since April, falling as low as 0.002%.
There was no bond market reaction to German producer prices data, which showed a 1.3% increase month-on-month and 8.5% increase year-on-year. The yearly increase is set for the biggest jump since 1981 according to Refinitiv Eikon – in another sign of inflationary pressure.
In the primary market, Germany raised 3.349 billion euros from the reopening of a seven-year bond at auction. (Reporting by Yoruk Bahceli, Editing by Sherry Jacob-Phillips and Shailesh Kuber)