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UPDATE 2-Fed uncertainty and pandemic drag German 10-year yields to 9-day lows

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices; adds background)

LONDON, Nov 20 (Reuters) - Benchmark German 10-year Bund yields fell to a nine-day low on Friday with rising coronavirus infections denting the optimism surrounding COVID-19 vaccines while uncertainty over the U.S. monetary stimulus program also weighed during the session.

Germany reported a record number of new coronavirus cases on Friday while the hurdles encountered by the European Recovery Fund has encouraged investors to seek safe-haven assets.

Government 10-year bond yields in Germany retreated to -0.585%, their lowest since Nov. 9.

“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.

Adding worries to the resurgent pandemic, Hungary and Poland blocked this week 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 flat at 0.60%.

At the open on Wall Street benchmark U.S. Treasury yields rose from 11-day lows as a request by the U.S. government for the Federal Reserve to return unused funds from programs meant to backstop markets was seen as unlikely to disrupt market conditions.

Optimism that the U.S. government may still agree to new stimulus helped to push the yields higher.

In a letter to Fed Chair Jerome Powell, U.S. Treasury Secretary Steven Mnuchin said the $455 billion allocated to Treasury under the CARES Act last spring should be instead available for Congress to reallocate.

The timing of Mnuchin’s request raised some concerns that funding markets could be more vulnerable to a reduction in liquidity heading during the crucial year-end period, when many market participants reduce their lending. (Reporting by Olga Cotaga; Editing by Alex Richardson)

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