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German 10-year yields fall to 9-day low after U.S. removes key Fed programmes

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* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds latest news and new comment)

LONDON, Nov 20 (Reuters) - Benchmark German 10-year Bund yields fell to a nine-day low on Friday, taking a cue from their U.S. counterparts after U.S. Treasury Secretary Steven Mnuchin on Thursday told the Federal Reserve to return money earmarked for pandemic lending.

The U.S. government will end some crisis programmes on Dec. 31 that the Federal Reserve views as vital to keeping the economy stable.

High worldwide coronavirus infections are also outweighing the optimism surrounding hopes of a COVID-19 vaccine.

Germany reported a record number of new coronavirus cases on Friday.

“While the vaccine certainly does represent a light at the end of the tunnel, the market’s initial ebullient response to the Pfizer announcement arguably overlooked the fact that we need to head through the tunnel first and that it is likely to get awfully dark long before any glimmer of light will be seen,” said Lyn Graham-Taylor, fixed income strategist at Rabobank.

“We would judge the former gloomy downward leg of the curve to be something that will last months rather than weeks as winter sees a high risk of repeated waves of infection and as herd immunity looks doubtful before late 2021 at the very least,” Graham-Taylor said.

This “clearly points to a bullish flattening of safe haven curves and an ongoing narrowing of the Atlantic spread”, he added.

The spread between German and U.S. 10-year government bond yields last stood at 142 basis points, close to its lowest since March.

All of this, mixed with hurdles that the European Recovery Fund has encountered recently, leave the door open for lower yields as investors seek safe-haven assets.

Government 10-year bond yields in Germany were last down 0.1% at -0.57%, after dipping to -0.58% earlier, their lowest since Nov. 9. U.S. Treasury 10-year yields fell to the same milestone overnight at 0.81%.

“Markets don’t appear ready to see through the current virus wave just yet,” said ING analysts in a note to clients. “The EU recovery fund setback and the termination of some Fed programmes add longer term worries.”

This week, Hungary and Poland blocked the adoption of the EU’s 2021-2027 budget and recovery fund over a clause that ties funds to respect of the rule of law.

The Recovery Fund had injected optimism in peripheral euro zone government bond markets earlier this year, an effect clearly seen in the spread between German and Italian yields. On Friday, that spread - essentially the premium riskier Italy has to pay to borrow money - was at 117 basis points, not far from a two-and-a-half year low.

Italian 10-year BTP yields were last flat at 0.60% .

Traders will be looking for flash consumer euro zone consumer confidence data in London afternoon trading. Economists polled by Reuters expected a fall to -17.7 in November, compared with a reading of -15.5 in the previous month. (Reporting by Olga Cotaga; Editing by Alex Richardson)

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