* Bonds yields fall after strong rally on Tuesday
* Moves driven by positioning, real yields – analysts
* Germany sees weak demand for 5-year bond auction (Adds details, updates prices)
July 7 (Reuters) – Germany’s 30-year bond yield fell to its lowest level since March on Wednesday, and many other benchmark government bond yields touched new multi-month lows, as fixed income assets extended their rally.
Analysts said that while technical factors like weaker liquidity and short-covering had driven the move, Chinese regulation headlines, the spread of the Delta COVID-19 variant and weak U.S. services data had boosted the case to hold safe-haven government bonds.
Yields edged lower and borrowing costs touched new lows on both sides of the Atlantic, though moves were much smaller than in the previous session as the region’s stock prices rose, while oil stabilised after volatile trading.
Germany’s 10-year yield, the benchmark for the region touched a new three-week low at -0.287% and was down nearly 2 bps by 1047 GMT. .
Its 30-year yield fell a basis point to 0.201%, the lowest since late March.
Italian 10-year yields touched their lowest since April, at 0.724%, while Spanish and French benchmark yields also fell.
“The moves seemed to be more of a result of trades being stopped out rather than anything more fundamental,” Mizuho analysts told clients.
“There is still a lot of cash to be put to work, and the possibility of momentum funds closing shorts ahead … may sustain the strength in rates in the near-term,” they added.
Analysts note the move this week has been driven by inflation-adjusted, or “real” bond yields falling. But market-based inflation expectations moved much less during the rally.
That is a sign of easing financial conditions and analysts say it signals investors seeing a tapering of bond purchases by central banks as less likely.
Germany’s 10-year real yield has dropped around 7 bps over the last two sessions, in line with the drop in its nominal yield, while market-based long-term euro zone inflation expectations are just 3 bps below 2018 highs touched on Tuesday. .
“Before the COVID-19 crisis hit us, we were actually in an easing mode regarding monetary policy in both U.S. and Euroland – so in order to get the economy back on track, then a continuation of the (quantitative easing) is needed, especially in Europe,” said Jens Peter Sorensen, chief analyst at Danske Bank.
Sorensen also noted that data releases in both the U.S. and Europe have missed expectations of late.
A Citi economic surprise index is at its lowest since May in the U.S. while a euro zone index has been falling this month.
In the primary market, Germany raised 3.949 billion euros from a new five-year bond auction on the back of 4.319 billion euros of demand, below the 5 billion euros targeted.
Following the European trading close the U.S. Federal Reserve will release its June meeting minutes. (Reporting by Yoruk Bahceli; editing by Barbara Lewis and Pravin Char)
