March 2, 2020 / 12:31 PM / a month ago

UPDATE 2-German Bund yield hits six-month low, ECB rate cut bets jump

* Bund yield falls to -0.667%, nears record low

* Markets see more than 90% chance of March ECB rate cut

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

By Dhara Ranasinghe

LONDON, March 2 (Reuters) - Safe-haven German bond yields fell to six-month lows on Monday while money markets bet that the European Central Bank could cut rates as early as its March meeting in the face of a coronavirus outbreak that has unnerved investors.

U.S. Federal Reserve Chair Jerome Powell on Friday said that the Fed would “act as appropriate” to support the economy, though he added that the economy remains in good shape overall.

Other central banks also pledged their support on Monday.

Bank of Japan Governor Haruhiko Kuroda said the BoJ would take necessary steps to stabilise markets while the Bank of England said it was working with the finance ministry and international partners to protect the British economy from the impact of coronavirus.

The ECB is also prepared to provide economic support, said ECB policymaker Francois Villeroy de Galhau, adding that more action is not yet required.

However, investor expectations of ECB rate cuts have been brought forward.

Eonia futures dated to the ECB’s April meeting show a 10-bps rate cut is now fully priced in. Money markets attach a more than a 90% chance of a rate cut at the March meeting, which takes place next week, up from about 10% a week ago.

Markets are now betting on two 10-bps rate cuts this year, versus only one last week.

Goldman Sachs said it expects the Fed to cut rates as early as its March 17-18 meeting and forecasts a cut of a half percentage point.

“The benefits of a co-ordinated policy response are rising,” said Richard McGuire, head of rates strategy at Rabobank. “The market moves we are seeing are very close to what we saw during the global (financial) crisis.”

Yields on 10-year German bonds, regarded as one of the safest assets in the world, last week tumbled 18 basis points in their biggest weekly drop since 2012 as coronavirus panic swept through markets.

They fell to six-month lows at -0.667% on Monday, within 10 bps of record lows hit in early September. Giving up some gains they were down 3 bps in late trade at -0.64%.

The U.S. 10-year Treasury yield tumbled as much as 7 bps to 1.05%, in danger of dropping below 1% for the first time, although prices gave up some gains in later trade.

“The week ahead will depend on how seriously the market is comforted by the Fed’s message of support. Though risk assets will likely have more stability, we expect investors to remain tentative until easing is actually announced,” said Mizuho rates strategist Peter McCallum.

Italian bond yields resumed their rise, having fallen in early trade. The gap between Italian and German 10-year bond yields rose to as high as 184 bps, its widest since late August.

Italy’s budget deficit was far lower than expected in 2019, data showed on Monday, reaching its lowest in 12 years and giving the government leeway to increase borrowing this year to counter the economic impact of coronavirus.

Economy Minister Roberto Gualtieri announced on Sunday the cabinet would approve this week 3.6 billion euros ($3.5 billion) of measures to help companies.

Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli Editing by David Goodman and Lisa Shumaker

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