March 6, 2020 / 8:33 AM / a month ago

UPDATE 3-German Bund yields hit record lows as coronavirus roils markets

(Updates with move in German Bund yields)

By Dhara Ranasinghe

LONDON, March 6 (Reuters) - Germany’s long-dated government bond yield slid to record lows on Friday, as coronavirus rattled world markets and investors fretted about just how much the global economy will be hit.

The outbreak spread across the United States on Thursday, surfacing in at least four new states. And the prospect of a prolonged economic slowdown whacked equity markets and sent investors, once again, fleeing to safe-haven bond markets.

In top-rated Germany, the 10-year German Bund yield fell to as low as -0.746%, a record low that overtook a previous low hit last September at the height of concern about the Sino-U.S. trade war.

Thirty-year Bund yields hit a record low of -0.337 . They were last down 10 bps on the day and set for their biggest one-day drop since 2016 - when the Brexit referendum rattled global markets.

“The pricing in of central bank easing is a very important factor in the bond market moves and you see that in the rate cut expectations being built up everywhere,” said Nick Kounis, head of financial markets research at ABN Amro.

“Macro expectations are being scaled back and inflation expectations are collapsing.”

Two-year German bond yields hit six-month lows, falling to almost -0.90% - a sign investors now price in extreme pessimism on euro zone growth.

In a worrying sign for the European Central Bank, a key gauge of the market’s long-term euro zone inflation expectations fell to a record low at around 1.0153%.

The ECB targets inflation at close to 2%.

Data showing German industrial orders surged in January and robust jobs growth in the United States provided little comfort to a market already looking past numbers that do not capture the impact of the coronavirus outbreak.

Ten-year bond yields in Italy, which has been at the centre of the coronavirus outbreak in Europe, steadied in late trade and were last hovering around 1.08% — drawing some support from expectations for ECB easing.

U.S. Treasury yields extended their decline, with 10 and 30-year yields hitting new record lows

Two-year U.S. Treasury yields, which fell below 0.5% , have slid around 90 bps in the past two weeks. That puts them on track for their biggest two-week fall since 1987.

Analysts said Friday’s bond market action not only reflected concern about the economic damage coronavirus will inflict but also worries that central bank action will prove ineffective.

The ECB meets next week and markets are positioned for a 10 bps rate cut. However, with rates already deeply negative, further easing is seen having a limited impact.

Earlier this week, the U.S. Federal Reserve delivered an emergency rate cut. Australian and Canadian central banks have also cut rates this week.

“Next week’s ECB meeting will be a difficult one with a wide range of views at the table,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Reporting by Dhara Ranasinghe; Editing by Larry King and Alison Williams

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