June 16, 2020 / 7:35 AM / 21 days ago

Demand for safe euro zone government debt falls after Fed announcement

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, June 16 (Reuters) - Core euro zone government bond yields rose on Tuesday and Italian yields fell after the Federal Reserve announced that it would purchase corporate bonds - a move which reduced demand for safe government debt.

The Fed said on Monday it will start purchasing corporate bonds on Tuesday in the secondary market, one of several emergency facilities opened during the coronavirus pandemic.

The announcement lifted global equities, which had fallen from late last week amid worries about the U.S. economy and confirmation of a new coronavirus cluster in Beijing.

Risk appetite was also boosted by a Bloomberg News report of possible fiscal stimulus in the United States, an easing of the U.S. stance on Huawei, and a smaller number of new coronavirus cases in Beijing compared with the day before.

“In absence of a further surge in new infections in China or the US, the market hopes about monetary and fiscal tailwinds alongside improving sentiment indicators should prevail,” wrote Commerzbank rates strategists in a note to clients.

German, French, Dutch and other core yields rose, but riskier Italian yields fell, having hit their lowest since the end of March on Monday.

The benchmark German 10-year Bund yield was up two basis points to -0.423% at 0700 GMT.

Italy’s 10-year yield was down around one basis point, at 1.397%.

Demand for Portuguese and Spanish government debt increased, with their 10-year yields falling around two bps .

Germany’s finance minister will ask parliament to increase new borrowing by a further 62.5 billion euros ($70.89 billion)to a record 218.5 billion this year – more than previously expected - to boost the country’s recovery from the coronavirus pandemic.

Olaf Scholz is expected to present his new spending plan on Wednesday after discussing it with the cabinet.

The Dutch economy is set for an unprecedented decline this year, government policy adviser CPB said on Tuesday. ($1 = 0.8817 euros) (Reporting by Elizabeth Howcroft, editing by Larry King)

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