May 13, 2020 / 7:46 AM / 14 days ago

Euro zone bond yields fall as caution returns

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

By Elizabeth Howcroft

LONDON, May 13 (Reuters) - Euro zone government bond yields fell on Wednesday, reversing a recent upward trend, as relative optimism about economies re-opening was replaced by caution over the slowness of recovery and the risk of a second wave of coronavirus infections.

Although yields have risen somewhat in recent weeks as the spread of the coronavirus slowed in some Asian and European countries and parts of the U.S. economy began to reopen after lockdowns, risk appetite was subdued on Wednesday.

“I think there’s a dawning realisation that this isn’t going to be a V-shaped recovery,” Lyn Graham-Taylor, fixed income strategist at Rabobank, said.

“People are just taking a second look at the fact that there are still massive restrictions and worries about resurgence of cases,” he added.

Leading U.S. infectious disease expert Anthony Fauci on Tuesday warned lawmakers that a premature lifting of lockdowns could lead to additional coronavirus outbreaks.

Fauci’s comments hit Wall Street stocks overnight, underlining fragile investor sentiment which has swung between optimism over some easing in lockdowns globally and anxiety about a fresh spike in coronavirus cases.

The German 10-year government bond yield, which had risen around 8 basis points since May 4, changed direction and fell around 3 bps as demand for the safe debt increased.

Meanwhile, the Italian 10-year government bond yield, which is the proxy for riskier peripheral European bonds, rose 2 bps .

The spread between German and Italian government bonds increased by 4 bps to 244.2, which if maintained would leave it set to widen for the third consecutive day.

Portuguese and Spanish government bond yields were also slightly up, following Italy . The French 10-year yield was down around 2 bps.

The European Union is expected to recommend on Wednesday that border restrictions be gradually lifted and travel allowed to restart in order to revive tourism, part of a series on non-binding recommendations by the European Commission.

The Austrian tourism minister said that the border between Austria and Germany would reopen from mid-June. nL8N2CV1VF]

German bund futures, which hit a 13-day low on Tuesday, edged up again, and were last up 0.2%.

Euro zone inflation expectations fell to a near seven-week low below 0.87% on Tuesday, according to a key market gauge , after edging lower over the last week.

The possibility of European fragmentation remains a cause for concern for investors, as the bloc struggles to co-ordinate its response to the coronavirus, which has hit tourism-dependent southern countries such as Italy and Spain hardest.

Germany’s Chancellor Angela Merkel told lawmakers on Tuesday that Germany must help its European Union neighbours revive their economies after the coronavirus crisis.

“We’ve heard really similar sentiment from Merkel before and when it comes down to it, it just fails to deliver on any meaningful front,” Rabobank’s Graham-Taylor said.

U.S. Federal Reserve Chairman Jerome Powell will speak at a webcast event at 1300 GMT. He is expected to comment on the chances of negative U.S. interest rates. (Reporting by Elizabeth Howcroft; Editing by Alexander Smith)

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