UPDATE 1-German yields drop as economic, health concerns curb EU summit euphoria

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

By Abhinav Ramnarayan

LONDON, July 22 (Reuters) – Yields on high-grade euro zone government bonds edged lower on Wednesday, as concern over the global economy and rising COVID-19 cases in the United States curbed risk sentiment and scotched some of the euphoria from the European Union’s stimulus deal.

Italian, Spanish and Portuguese bond yield spreads over benchmark Germany remain close to their tightest levels since early March, but the rally has eased.

U.S. President Donald Trump warned on Tuesday that the coronavirus pandemic would get worse before it got better.

On the data front, Japan’s factory activity contracted for a 15th straight month in July, denting hopes for a quick global recovery.

“I doubt that we will manage to price a significant improvement in sentiment given the potential for rising cases in the United States after lockdown measures were dropped too early in some states,” said ING rates strategist Antoine Bouvet.

“Markets will remain on high alert, and investors will just look to park their money in safe bonds with carry.”

Carry is a phrase used in markets to describe a trade where investors borrow at low rates to invest in higher-yielding assets, pocketing the difference.

Germany’s 10-year bond yields dropped two basis points to -0.48%, a move mirrored by other high-grade government bond such as Dutch and French debt.

Italy’s 10-year government bond yields were also lower, around 1.14%, higher than Tuesday’s four-and-a-month low of 1.117%.

That low was hit after EU leaders clinched a deal on a massive stimulus plan for their coronavirus-throttled economies in the early hours of Tuesday, after a fractious summit lasting almost five days.

Demand for euro zone government bonds was also being driven by worries over the Brexit transition period ending without any deal between Britain and the EU, analysts said.

As a result, a German auction of long-dated debt received good take-up, with over 3 billion euros of demand allowing the country’s debt agency to sell 1.26 billion euros of 30-year Bunds. (Reporting by Abhinav Ramnarayan; editing by Alex Richardson, Larry King)

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