LONDON (Reuters) - Italian bond yields edged up from near two-week lows on Wednesday on news the government may tighten measures to combat the coronavirus outbreak, but bets on European Central Bank policy easing supported debt markets across most of southern Europe.
Money markets are positioned for a 10 basis-point rate cut at next week’s ECB meeting ECBWATCH following a 50 bps emergency cut from the U.S. Federal Reserve on Tuesday.
The ECB’s Governing Council held a conference call late on Tuesday to assess the impact of coronavirus but policy action was not on the agenda, two sources told Reuters..
But with a rate cut seen having a limited impact, other policy options are on the table. Sources said possible measures under discussion include a targeted longer-term refinancing operation (TLTRO) directed at small- and medium-sized enterprises in the 19-country euro zone.
“The view that the ECB could step in with some measures is out there,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.
Spain’s 10-year bond yield fell as low as 0.14% ES10YT=RR, its lowest since October but edged up to 0.17% towards close of trade. Portuguese yields slipped 2 bps at 0.195% PT10YT=RR just off an earlier low of 0.15%.
Italy’s 10-year bond yield initially fell seven basis points to 0.913% IT10YT=RR, its lowest in almost two weeks, before a government source told Reuters that all schools and universities would be closed from Thursday to contain the outbreak in Europe’s worst hit country.
Ratings agency S&P Global meanwhile said it expected Italy’s economy to contract by 0.3% in 2020.
“The market is caught between two forces,” said Richard McGuire, head of rates strategy at Rabobank.
“One, concern over the impact of coronavirus on the economy, and two, the boost to risk appetite implicit in an easing of policy globally.”
British 10-year gilt yields earlier touched a record low around 0.34% GB10YT=RR, in a sign that investors were also positioning for a near-term rate cut from the Bank of England.
U.S. 10-year Treasury yields remained below 1% US10YT=RR on Wednesday, having dropped below that level after the Fed cut. That dive has pushed the gap over German Bund yields to 154 basis points - its tightest since 2016.
Germany’s 10-year Bund yield was flat around -0.635% DE10YT=RR - just off six-month lows set on Monday. It is some 10 bps off record lows hit last September, levels that many expect will be tested soon.
“Yesterday, the first reaction to the Fed rate cut was positive and then a view set in that if the Fed sees the need for an emergency cut, then it is quite concerned, so risk aversion has increased again,” said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.
U.S./Bund yield gap: here
Reporting by Dhara Ranasinghe, Editing by William Maclean, Toby Chopra and Nick Macfie