European debt markets unfazed as stocks hit record highs

By Dhara Ranasinghe

LONDON (Reuters) - Euro zone bond yields were a tad higher on Wednesday in a further sign that record-high stock markets are not enough to shift demand from fixed income markets supported by central bank stimulus.

World shares rallied to a record peak after the formal start of U.S. president-elect Joe Biden's transition to the White House and on growing confidence surrounding COVID-19 vaccines.

While other safe-havens such as gold and the U.S. dollar have sold off in the face of increased optimism, selling of bonds in Europe and the United States has been modest.

In early trade, Germany's benchmark 10-year Bund yield briefly touched -0.546%, its highest in almost a week but around 10 bps below highs hit earlier this month following Pfizer's update on an effective COVID-19 vaccine.

The pandemic is expected to take a toll on growth long after a vaccine is rolled out, encouraging central banks to keep aggressive stimulus in place - a backdrop that lends itself to low bond yields.

"There are generally three things that move bond markets - (economic) growth, inflation and the change in policy rates," said Jim Caron, a fixed income portfolio manager at Morgan Stanley Investment Management.

"We know policy rates are not going to change anytime soon and people have been revising down growth and inflation forecasts because of the pandemic, so that's the main reason why bonds are supported."

In southern Europe, bond yields also edged higher on Wednesday but kept recent record lows in sight.

Italy's 10-year bond yield was up just 1 basis point on the day at 0.59%, having hit a fresh record low just a day earlier.

At 0.05% , Portugal's 10-year bond yields remains within striking distance of negative-yield territory.

"The here-and-now of the second covid wave - exemplified again by yesterday's IFO - and a very cautious central bank still cap the upside in yields," said Benjamin Schroeder, a senior rates strategist at ING.

He was referring to Germany's Ifo business sentiment index, which fell for the second month in a row in November.

(This story corrects Portugal bond yield number in paragraph 10 to 0.05% from 0.5%, no other changes to text)

(Reporting by Dhara Ranasinghe;Editing by Elaine Hardcastle)