August 8, 2019 / 3:20 PM / 10 days ago

UPDATE 1-German bond yields, stocks gain after official flags possible fiscal U-turn

(Adds further detail on Euro zone bond markets, comment)

By Virginia Furness and Tommy Wilkes

LONDON, Aug 8 (Reuters) - German government bond yields rose and the stock market extended gains on Thursday after a senior government official said Berlin was considering a fiscal policy U-turn to issue new debt to finance a climate protection programme.

With Germany on the cusp of an industrial recession amid concerns that the European Central Bank is running out of ammunition to stimulate the Europe’s ailing economy, many analysts have said it is up to Germany to spend its way back to growth.

The government is considering ditching its long-cherished balanced budget policy to help finance the costly climate programme, the government official told Reuters.

With a debate running about whether the evaporation of borrowing rates should be grasped by governments to deal with the climate emergency, the reaction to those comments shows how sensitive the market is to signs of such stimulus.

German benchmark bond yields hit a day’s high of -0.523%, while the 30-year yield rose to within a whisker of zero at -0.001%.

Germany’s DAX 30 share index extended a rally and was up 1.27%.

The euro briefly rose but it quickly reversed the move and was last at $1.1204.

Analysts said they were keen to see action rather than words alone.

“Germany has been for many years defending its budgetary position, and its fiscal stance,” said Matt Cairns, rates strategist at Rabobank.

“It has had a pretty notable impact on the 10-year bund yield but more than half of that has been retraced. The global outlook and overall monetary policy stance will override any political headlines.”

European government bonds have enjoyed a blistering rally in recent sessions as investors fearful of a global economic downturn looked for safety. The 10-year German yield is now headed for its first rise after nine days of falls.

Thursday saw a small pullback after a shock large interest rate cut in New Zealand and dire German industrial production data fuelled expectations for rate cuts and new asset purchases by the ECB.

Italian government bond yields also rose on Thursday, with the Italian/German 10-year bond yield gap at its widest in a month following signs of growing tensions within the ruling coalition in Rome that could lead to early elections in the euro zone’s third biggest economy.

The League party said on Thursday that if its growing policy differences with its coalition partner the 5-Star Movement led to a government collapse then the only option was fresh elections.

The 10-year Italian bond yield extended its rise to 1.58% , up 17 basis points on the day. That pushed the gap over safe-haven German Bund yields to around 211 bps, the widest in a month.

Reporting by Tommy Wilkes and Virginia Furness

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