UPDATE 2-Euro zone bond yields bounce as Omicron relief boosts risk

·3 min read

(Adds ECB's Muller and Kazimir, money printing data, updates prices)

By Abhinav Ramnarayan

LONDON, Dec 7 (Reuters) - Euro zone bond yields bounced off recent lows as global markets rallied on Tuesday, lifted by hopes the new Omicron coronavirus variant would prove less severe than initially feared.

Though the emergence of the new variant has caused alarm worldwide and pushed yields lower across major government bond markets, health officials in South Africa and the United States said cases have not been severe.

Reports in South Africa said those infected with Omicron there had only shown mild symptoms and the top U.S. infectious disease official, Anthony Fauci, told CNN "it does not look like there's a great degree of severity" so far.

The pan-European STOXX 600 and Wall Street's S&P 500 both jumped over 2% with shares in technology firms leading markets forward.

Euro zone government bond yields rose across the board, with Germany's 10-year Bund yield, the benchmark for the bloc, up above 1.5 basis points (bps) at -0.372% at 1553 GMT, rising off a three-month low hit on Monday.

Analysts cautioned the move could be short-lived.

"Good news relating to the severity of Omicron should be taken with a pinch of salt. Faster transmission could offset the benefits of milder symptoms," researchers at ING said in a note.

Other euro zone bond yields, such as those of France and Italy,, also ticked up but the rise gradually faded and two ECB policy makers pleaded for the ECB to take a cautious approach towards stimulus.

Peter Kazimir said the central bank should focus its stimulus effort on a legacy Asset Purchase Programme when emergency support expires in March and must keep its commitment short as inflation could exceed expectations.

His colleague Madis Muller argued that because euro zone inflation could exceed the ECB's forecast in the long term, there was no reason to boost the legacy bond purchase programme when the emergency scheme ends next March.

Data published on Tuesday showed the ECB bought a net 13.451 billion euros ($15.12 billion) of assets last week as part of its quantitative easing programme, below the 22.169 billion euros it purchased a week earlier.

With a crucial policy meeting coming up on Dec. 16, the ECB is weighing options for a new policy setting but uncertainty, from high inflation to a new pandemic wave, has kept an unusually wide range of proposals on the table, fuelling divisions among policymakers.

Euro zone inflation in 2022 will probably exceed the ECB's projection of 1.7% and stay above the central bank's target of 2% for the entire year, ECB policymaker Robert Holzmann said.

A key market gauge of long-term euro zone inflation expectations was at 1.9087% on Tuesday, off its recent lows of 1.8048%.

Elsewhere, data showed that the euro zone economy expanded 2.2% quarter-on-quarter in the July-September period and 3.9% year-on-year as the economy continued to recover from the deep pandemic-induced recession in 2020.

However, a survey in Germany showed that investor sentiment deteriorated in December as a fourth wave of COVID-19 infections and persistent supply bottlenecks in manufacturing clouded the growth outlook for Europe's largest economy. (Reporting by Abhinav Ramnarayan and Julien Ponthus; Editing by Gareth Jones, Emelia Sithole-Matarise and Angus MacSwan)

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