February 14, 2020 / 11:43 AM / 3 days ago

UPDATE 2-Euro zone bond yields dip as bleak German data fans economy fears

* Euro zone bond yields lower

* German GDP data fans recession fears in powerhouse economy

* Italian yields off 4-month lows (Updates throughout)

By Dhara Ranasinghe and Olga Cotaga

LONDON, Feb 14 (Reuters) - Most government bond yields across the euro area edged lower on Friday, after bleak economic data from Germany added to concerns about the bloc’s economic outlook.

Italian yields were broadly higher, with its bonds underperforming the broader euro zone market, following the latest signs of unrest in the ruling coalition government.

Data showed the German economy stagnated in the fourth quarter due to weaker private consumption and state spending, renewing fears of a recession just as Chancellor Angela Merkel’s conservatives are preoccupied with a search for a new leader.

The European Union’s statistics office said GDP in the 19 countries sharing the euro expanded 0.1% quarter-on-quarter in the October-December period, as announced on Jan 31, for a 0.9% year-on-year gain - a downward revision from the previously estimated 1.0% growth.

“We are now getting a change in tone in markets and more concern about the growth outlook,” said Lyn Graham-Taylor, a rates strategist at Rabobank in London.

“But I’m not sure that’s been fully priced in yet.”

While economic data late last year suggested the worst may be over for the euro zone economy, the coronavirus outbreak has fuelled concerns about the outlook. Market inflation expectations are once again pointing downwards.

A Reuters poll of economists indicated the Chinese economy will grow at its slowest rate since the financial crisis in the current quarter due to the effect of the virus.

Most 10-year bond yields in the euro area were 1-2 basis points (bps) lower on the day .

Germany’s benchmark 10-year Bund yield was down 1.5 bps at -0.41%. It is down 22 bps so far this year, French and Dutch yields are roughly 28 bps lower each.

Given that China is the world’s second biggest economy, its stumble is likely to hold back growth elsewhere, prompting central banks to step in and inject further liquidity into financial markets, creating more demand for government bonds.

But economists say the downturn should be short-lived and the rebound quick if the outbreak is contained.

New cases outside China’s Hubei region, the heart of the outbreak, declined for the 10th consecutive day on Thursday.

“Difficulties in assessing the (coronavirus) situation have resulted in volatile, but sideways, moves in rates,” said Antoine Bouvet, senior rates strategist at ING.

“Recent days have proven that the case count should be taken with a pinch of salt, as it is inherently polluted by diagnostic difficulties.”

Italy’s 10-year bond yield, which fell to its lowest level in around four months on Thursday, was slightly higher on the day at 0.91%.

Analysts said appetite for Italian debt may also have been impacted slightly by former Prime Minister Matteo Renzi saying Italy’s government could collapse after his small party boycotted a cabinet meeting over a contested justice reform.

Renzi’s centrist Italia Viva party is in the coalition with the anti-establishment 5-Star Movement and the centre-left Democratic Party (PD), but he has constantly taken centre stage in coalition bickering since it was formed last September. (Reporting by Dhara Ranasinghe and Olga Cotega; Editing by Mark Potter)

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