April 30, 2020 / 9:40 AM / a month ago

UPDATE 1-German Bund yields fall to one-month lows ahead of ECB meeting

* ECB statement at 1145 GMT, news conference at 1230 GMT

* Hopes of further stimulus builds

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with move in Bunds, euro zone data)

By Dhara Ranasinghe

LONDON, April 30 (Reuters) - Germany’s 10-year bond yields hit one-month lows, as economic data highlighted the blow being felt by the coronavirus crisis ahead of a European Central Bank meeting later on Thursday.

A preliminary reading of euro zone economic growth in the first quarter showed gross domestic product fell 3.8% quarter-on-quarter. Inflation in the bloc fell to an annual rate of 0.4% in the euro zone in April, from 0.7% in March.

Printing cash at a record pace to soak up ballooning state debt caused by the pandemic, the ECB is on its way to quickly exhausting the emergency bond purchases offered last month.

That has raised doubts about its commitment to help the euro zone through the worst economic crisis for decades and may encourage it to increase its support.

In addition, Italy’s borrowing costs have risen again - coming under some upward pressure on Wednesday following an unexpected Fitch Ratings downgrade. They had fallen after the ECB rolled out its Pandemic Emergency Purchase Programme (PEPP) last month.

The ECB is expected to discuss expanding stimulus at its meeting on Thursday, although analysts say further action is more likely at its June meeting.

Germany’s benchmark 10-year Bund yield fell to a one-month low at around -0.51% and was last down 3 basis points on the day.

“We consider an increase of the PEPP envelope at today’s meeting premature,” said Christoph Rieger, head of rates and credit strategy at Commerzbank. “Visibility is still low and this would further undermine the incentives for the politicians to act.”

The U.S. Federal Reserve on Wednesday dashed hopes for a fast rebound from the coronavirus, promising to expand emergency programmes as needed.

Italian yields nudged higher, reversing earlier falls. Italy’s 10-year bond yield was last up 2 bps at 1.79% .

There was some focus on whether the ECB would discuss whether to buy non-investment grade debt, or so called “junk” bonds, as part of its bond-buying stimulus scheme.

Bond strategists also want to see if the central bank will provide more details of emergency bond purchases. The ECB releases almost no data on PEPP and has not decided what to do with bonds it buys when they mature.

Clarity on these issues could bolster market confidence and shore up sentiment towards Italian bonds, known as BTPs, where the ECB is suspected to have stepped up buying to contain a rise in borrowing costs, analysts said.

“I would expect the ECB to widen the programme at some point, and that would allow it to buy more BTPs if needed and give EU authorities more space to act,” said Mauro Vittorangeli, chief investment officer for conviction fixed income at Allianz Global Investors.

Reporting by Dhara Ranasinghe; Editing by Larry King and Alex Richardson

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