Euro zone bond yields held near recent lows on Monday with investors concerned about possible new restrictions to fight the coronavirus outbreak, although signs that U.S. President Donald Trump's health was improving lifted the mood.
Expectations for more European Central Bank stimulus before year-end and data on Friday showing euro zone inflation has sunk deeper into negative territory are keeping euro zone bond yields near their recent lows.
Italian yields hit another record low after falling on Friday following the weaker than expected inflation reading.
However, moves in bond markets have been minimal in recent weeks with volatility very low - euro zone yields barely budged on Friday when news broke that Trump had tested positive for COVID-19 and was later taken to hospital.
Analysts say that with yields so low already there is little room for them to fall further.
Unicredit analysts said they did not expect a further sharp drop in long-dated German Bund yields from current levels unless risk aversion increased sharply, the COVID-19 situation deteriorated rapidly or markets began pricing in a further cut to the ECB's deposit rate.
Other analysts said that recent data signaled a slowing euro zone economic recovery, and that they were now factoring in more ECB stimulus earlier than they previously thought.
"Recent data has disappointed, suggesting the rebound is already losing steam, especially in the services sector," Morgan Stanley economists said in a research note sent to clients on Monday.
"With inflation holding well below target and signs that the recovery is slowing, we recently brought forward our ECB call and now expect a 400 billion euro PEPP [the ECB's pandemic emergency purchase program] top up and extension until end-21 in December."
The three-month euribor interbank rate fell to a new record low at -0.509%.
The 10-year German bond yield stood at -0.537%, little changed on the day, while French bond yields inched lower .
The French government has announced new restrictions, including the closure of bars, in Paris to combat rising cases of COVID-19 and other countries across Europe were weighing up more measures to stop the spread of the virus.
The 10-year Italian yield slipped more than 1 basis point to 0.723%, another record low. (Reuters)