March 24, 2020 / 11:33 AM / 10 days ago

UPDATE 2-Euro zone bond markets shrug off ultra-weak PMIs

* PMIs crumble to record low, economic news set to worsen

* Germany’s 10-year yield little moved, up 4 bps

* Euro zone finance ministers discuss joint debt issuance

* Euro zone periphery govt bond yields (Updates prices)

By Yoruk Bahceli

LONDON, March 24 (Reuters) - Euro zone bond yields mostly shrugged off an historic slump in the region’s business activity on Tuesday, with March purchasing manager index (PMI) readings laying bare the extent of the coronavirus outbreak’s impact on the bloc’s economies.

Bond markets had already been bracing for a huge downturn, and were weighing this against an expected rise in issuance as governments increase fiscal stimulus to counter the slowdown.

Euro zone business activity crumbled, with IHS Markit’s euro zone composite flash PMI plummeting to a record low of 31.4 from February’s 51.6, well below the 50 level that signals growth and far lower than Reuters poll expectations.

“It’s that it’s a bit old news, and the developments have been really quick, so the market is more likely to trade on what’s happened since,” said Antoine Bouvet, senior rates strategist at ING.

Further measures to lock down populations came into effect after the survey was conducted, meaning that the actual economic downturn in March is likely to be greater.

“There’s been a strong market intervention by the Fed, and I think this is more conducive of a positive mood and the market,” Bouvet said of the lack of market reaction.

Germany’s 10-year yield extended its rise with investors buying back into rebounding stock markets. The yield was last up 4 basis points on the day at -0.33.8%. The 10-year benchmark yield touched a record low of -0.90% earlier in March.

Other core euro zone bond yields also rose .

“I think we have reached some kind of equilibrium trading range in safe havens,” said DZ Bank strategist Rene Albrecht.

“Given the prospect for the economic downturn and much more issuance going forward, I think the level where yields are settling down is the place for them to be.”

Bond yields were up overall on the day alongside stocks , extending a reversal of last week’s pattern, when safe-haven bonds and shares fell as investors sold liquid assets to make up for losses elsewhere.

Germany sold 2.9 billion euros of two-year bonds and retained another 1.1 billion euros with demand exceeding the amount sold by a relatively weak 1.2 times.

Spain raised 10 billion euros of new seven-year bonds on Tuesday, receiving strong demand in a sign of confidence in the euro area’s weaker-rated borrowers following emergency measures launched by the European Central Bank last week.

Euro zone finance ministers were on Tuesday discussing European Commission proposals to make use of the bloc’s bailout fund to fight the economic impact of the coronavirus outbreak.

Italy is in favour of allowing the fund to provide financial support without conditions, and also supports the issuance of common European Union bonds.

Germany, which has announced a massive fiscal stimulus plan, once again dismissed calls for joint debt issuance on Monday. (Reporting by Yoruk Bahceli Additional reporting by Tommy Reggiori Wilkes Editing by Jan Harvey and Kevin Liffey)

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