MILAN- German government bond yields edged lower on Thursday but lacked clear direction as investors continued to balance positive vaccine news against coronavirus restrictions which would dampen the economic recovery.

The market's focus has turned to remarks from ECB president Christine Lagarde and to the EU budget summit after a spat over the EU recovery fund.

Lagarde called on European Union leaders to end a potentially damaging budget impasse and unlock aid for a region that is facing a severe hit from the second wave of the coronavirus pandemic. 

The benchmark 10-year German government bond yield was down 1.5 basis points at -0.571%, while Italy’s 10-year BTP yield was up 0.5 basis points at 0.621%. Both were near recent lows, after a surge on Monday last week when Pfizer announced an effective vaccine.

“Markets remained in limbo as vaccine hopes and fears about the fallout of still-rising COVID-19 cases cancelled each other out,” Unicredit told clients.

“Rising coronavirus infection numbers and new restriction measures implemented in the U.S. are weighing on appetite for risk,” it added.

In money markets, one and three-month Euribor interbank borrowing rates were at record lows of -0.556% and -0.527% respectively on Thursday, signalling expectations of super-easy monetary policy.

The German EU presidency is still seeking a solution to the row in the European Union over a budget and recovery fund, German Foreign Minister Heiko Maas said on Thursday. 

Citi said that a delay in the funds, which had been expected in the first quarter of 2021, could lead to an increase in government bond supply in the first half of the year as sovereigns borrowed to replace the funding

"Spreads are taking this in stride so far but could react to any protraction of negotiations in coming weeks," the bank's analysts said.

Hungary and Poland blocked the adoption of the EU's 2021-2027 budget and a planned coronavirus recovery fund at a meeting of ambassadors of EU nations on Monday.

“The spat with Poland and Hungary about the rule of law mechanism probably needs more drama and may not be solved today,” Commerzbank told clients.

France and Spain will be active on primary market. But investors “will have little to digest from today’s data and event schedule", Unicredit said, noting that the U.S. will also release weekly jobless claims data and the Philly Fed index.

(Reporting by Stefano Rebaudo; Editing by Kirsten Donovan) ((Stefano.Rebaudo@thomsonreuters.com;))