March 20, 2020 / 11:59 AM / 14 days ago

UPDATE 2-Euro zone bond yields tumble as risk sentiment picks up

* Calm returns to bond markets as week draws to close

* Yields broadly lower

* Central bank action helps stem panic

* Euro zone periphery govt bond yields (Updates prices, cbank coordinated action, German news)

By Yoruk Bahceli

LONDON, March 20 (Reuters) - Euro zone bond yields fell on Friday as risk sentiment picked up to support Southern European bonds, and German bonds retraced some of their losses from the previous session.

Global stock markets recovered somewhat on Friday following this week’s rout; European shares were set for a second straight session of gains as more countries took monetary and fiscal measures to cushion the economic impact of the coronavirus outbreak

Norway’s central bank became the latest to cut rates , China was set to unleash trillions of yuan of fiscal stimulus to revive its economy and on Friday major central banks including the Federal Reserve and European Central Bank (ECB) acted together to ease the strain in global funding markets.

Italian bond yields were lower, with the 10-year yield last down 21 basis points at 1.61%, after falling nearly 50 bps on Thursday. They were set for their biggest weekly fall since late January.

The ECB’s 750 million-euro emergency bond purchase scheme, announced on Wednesday, has boosted Southern European debt, alleviating some concern over how already heavily-indebted states would finance the fiscal measures needed to defend against coronavirus.

Spanish and Portuguese 10-year bond yields were down around 20 bps each .

“We have bonds and stocks moving in’s clearly a sign of optimism being regained in the market,” said ING senior rates strategist Antoine Bouvet. “It’s a sign that central bank intervention is baring fruit.”

German bonds - a safe haven that would sell off when risk sentiment picked up in normal times - also rallied.

The 10-year Bund yield slid 17 bps to -0.33%, after touching over 10-month highs on Thursday at -0.14%.

Mizuho rates strategist Peter McCallum said this was a relatively modest move reversing some of Thursday’s sell-off after an official with knowledge of the plan said that Germany plans to soon declare an exception to its constitutional debt brake, which limits the amount of debt it can issue.

A German supplementary budget to counter the economic impact of the coronavirus will be worth around 150 billion euros ($161.18 billion), a government source said on Friday.

Bunds have also been under pressure this week as investors sold safe-haven assets to make up for losses elsewhere — 10-year bond yields are up 25 bps this week, set for their worst week since June 2015.

“We can expect that after a while confidence will return to this market and return to safe-haven status and their diversification advantage,” ING’s Bouvet said of sovereign bonds. (Reporting by Yoruk Bahceli, Additional reporting by Dhara Ranasinghe; editing by Larry King, Kirsten Donovan and Timothy Heritage)

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