June 5, 2020 / 7:42 AM / a month ago

Investors shed safe-haven German Bunds as ECB fortifies the euro zone

* German 30-year yields rise to five-month high

* Long-end Italy/Germany spread at tightest since March

* U.S. payroll numbers due later on Friday

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

By Abhinav Ramnarayan

LONDON, June 5 (Reuters) - Safe-haven German government bonds sold off for a second day on Friday, with yields reaching their highest levels in months, after the European Central Bank’s support for the euro helped boost sentiment towards the euro zone.

Southern European borrowing costs fell further and the gap between long-dated Italian and German bond yields shrunk to its narrowest since the first coronavirus-related market rout in late March.

The ECB approved a bigger-than-expected expansion of its stimulus package on Thursday to prop up an economy plunged by the coronavirus pandemic into its worst recession since World War Two.

“If you think about what the ECB has done, it is dramatically supporting the euro through reducing tail risk. Peripheral spreads will keep tightening, especially at the long end,” said Peter Chatwell, Mizuho’s head of rates.

The gap between Italian and German 30-year bond yields was at its narrowest since March 27 at 211 basis points.

Long-dated German government bond yields rose six basis points to 0.24%, its highest level since January. The bonds were trading at a negative yield just 10 days ago.

“Yesterday, Christine (Lagarde) fired yet another bazooka - almost doubling the size of the purchase programme. That means a lot of support for Italy,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham.

Italy’s benchmark 10-year bond yields were at 1.42% on Friday, close to Thursday’s two-month low and half what they were in mid-March, at the height of the worries around the spread of the novel coronavirus.

Greek and Cypriot 10-year yields were also close to their lowest levels since March.

Employment data from the United States is due later on Friday, and Chatwell at Mizuho said that an improvement on last month’s dire numbers could further support sentiment. (Reporting by Abhinav Ramnarayan, editing by Larry King)

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