UPDATE 3-German bond yields fall to lowest since March as COVID cases surge

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, updates prices)

LONDON, Oct 15 (Reuters) – German government bond yields fell to their lowest since March on Thursday and the risk premium on Italian bonds saw its biggest daily jump since April as rising coronavirus cases in Europe raised concern about further lockdowns that would deal another blow to the struggling euro zone economy.

France imposed curfews while other European nations are closing schools, cancelling surgeries and enlisting student medics as overwhelmed authorities face the nightmare scenario of a COVID-19 resurgence at the onset of winter.

In the United Kingdom, tighter COVID-19 lockdowns could be imposed on London and northern England by Prime Minister Boris Johnson’s government on Thursday.

“The prospect of more localised lockdowns would hurt economic activity when they are already struggling and that is weighing on the bond markets,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.

Developed markets now account for about 30% of new cases, compared to 25% a month ago, Capital Economics said.

Yields on perceived safe-haven German government bonds for 10-year maturities fell more than 5 bps to -0.637%, the lowest since mid-March, when markets panicked as the coronavirus pandemic first spread globally. Yields have fallen nearly 10 bps this week.

Yields on other higher-rated bond markets like France and Belgium also fell to their lowest levels since March as authorities prepare to lock down parts of their economies.

A rally in Southern European government debt markets stalled on Thursday as investors took profits, a day after Italian bond yields fell to record lows as investors priced in additional support from the European Central Bank, of which Italy would be a leading beneficiary.

Italian 10-year bond yields rose as high as 0.747%, the highest in nearly a week, after the country was among several in Europe reporting record high daily new infections.

That yanked the spread between German and Italian bonds wider, to more than 130 bps on Thursday from 119 bps on Wednesday, in its biggest daily rise since April.

Even before the latest round of restrictions, data this week showed the European economy was losing steam by the end of the third quarter.

Other Southern European bond yields rose, but by less than Italy, with Spain and Portugal’s 10-year yields up 3 basis points on the day.

Spain’s government said it would issue debt to compensate for any potential delay in the approval and disbursement of EU rescue funds. Member states remain divided over a scheme that ties access to the money to respecting the rule of law.

Downbeat comments from U.S. Treasury Secretary Steven Mnuchin that a stimulus deal was unlikely before the U.S. election and data showing U.S. jobless claims rise more than expected provided other reasons for profit-taking. .

In Europe, ECB chief Christine Lagarde said headline inflation is likely to remain negative over the coming months before turning positive in early 2021.

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