February 3, 2020 / 11:13 AM / 15 days ago

UPDATE 2-Euro zone bond yields keep multi-month lows in sight

* Bond yields inch up from over 3-month lows

* But mood in bond markets remains cautious

* Focus on economic fallout from coronavirus

* Euro zone periphery government bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds latest Brexit developments)

By Dhara Ranasinghe

LONDON, Feb 3 (Reuters) - Euro zone bond yields inched up on Monday but remained within sight of multi-month lows in a sign that bond investors remain cautious as they assess the economic repercussions from the spread of a coronavirus.

Chinese markets sold off sharply on Monday, the first trading session after an extended Lunar New Year break. But this was mostly a product of selling pressure that had built up over the holiday and not a reflection of new market fears, analysts said.

In a sign of a slightly more positive tone in world markets, European shares rallied and the safe-haven yen and Swiss franc weakened.

Yields on benchmark 10-year government bonds were a touch higher across the currency bloc, but remained within sight of the lows hit on Friday - reflecting a generally cautious tone among investors.

Germany’s 10-year Bund yield was just one basis point higher on the day at -0.44%, hovering near more than three-month lows hit at the end of last week.

Yields on German 30-year government bond yields are at 0.07% and less than 10 bps away from negative yield territory.

“Chinese authorities have shown they have the strength and will to protect their markets and that has probably fed through to a stabilisation, but ultimately this (coronavirus) remains a complete unknown quantity and nobody knows how long it will go on for and what the impact will be on a human and economic scale,” said Rabobank rates strategist Matt Cairns.

“That will continue to push down safe-haven yields until we know that it’s under control.”

China’s central bank unexpectedly lowered the interest rates on reverse repurchase agreements by 10 bps on Monday, as authorities stepped up measures to relieve pressure on the economy from the rapidly spreading virus outbreak.

European Central Bank vice president Luis de Guindos said the ECB sees early signs of stabilisation in the global economy but cautioned that the coronavirus outbreak is creating uncertainty.

Investors have started to ratchet up expectations for an ECB rate cut by year-end, with markets pricing in more than a 60% chance of a 10 bps cut by year-end.

“Over the coming days, investors are likely to upgrade their estimates of the expected economic fallout related to 2019-nCov (coronavirus),” analysts at UniCredit said in a note.

“As long as the increase in the number of cases does not flatten perceptibly, market sentiment will most probably remain under pressure.”

Renewed uncertainty over Britain’s future relations with the European Union also limited the rise in euro zone bond yields.

The European Union and Britain clashed over a post-Brexit trade deal on Monday. The two sides set out very different visions of a future relationship that could result in the most distant of ties.

Reporting by Dhara Ranasinghe; Editing by Kirsten Donovan and Grant McCool

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