March 25, 2020 / 12:05 PM / 16 days ago

UPDATE 2-Higher-rated yields tick up as U.S. fiscal boost soothes nerves

* Italy/Germany bond yield gap well off highs

* U.S., European fiscal stimulus gives heart to investors

* But lock downs could severely hurt global economy

* Eurozone periphery bond yields tmsnrt.rs/2ii2Bqr (Adds inflation expectations, updates prices)

By Abhinav Ramnarayan

LONDON, March 25 (Reuters) - Most euro zone bond yields edged higher on Wednesday after policymakers in Europe and the United States approved extraordinary measures to lessen the impact of the coronavirus crisis, although stock markets suffered some losses.

The closely-watched spread between Italian and German 10-year yields was a few basis points tighter at 182 basis points, well off last week’s 14-month high of 319 bps.

“That spread volatility should continue to stabilise from the highs we have seen recently after quite swift responses from the U.S.,” said DZ Bank rates strategist Christian Lenk.

U.S. senators and officials in President Donald Trump’s administration agreed on a massive economic stimulus bill to alleviate the economic impact of the coronavirus outbreak.

Meanwhile, European Central Bank (ECB) head Christine Lagarde asked euro zone finance ministers on Tuesday to seriously consider a one-off joint debt issue of “coronabonds” to help fight the epidemic, two officials said.

Germany is open to using the European Stability Mechanism to prop up economies hit by the coronavirus under certain circumstances, Der Spiegel magazine reported.

Germany’s 10-year government bond, the benchmark for the region, saw its yield edge 3 basis points higher in late trade to -0.29%.

Dutch and Austrian bonds underperformed, with their 10-year yields up 10 and 8 basis points respectively . Italian 10-year borrowing costs were down a basis point at 1.59% or nearly half last week’s high of 3.01%.

Other government bond markets referred to as peripheral, such as Spain, saw a pick-up in demand with yields 5-6 bps lower across the curve.,

“Risk assets bounced yesterday in the aftermath of positive noises for the U.S. fiscal deal’s progress and the Fed’s commitment to buy unlimited U.S. Treasuries and MBS,” Mizuho analysts said in a note.

A key gauge of long-term euro zone inflation expectations, the five-year, five-year forward, bounced to a one-week high above 0.80%.

However, analysts said the relative calm depended on the success of the battle to contain the spread of the coronavirus, and also on how long lockdowns continue and the potential impact on supply chains and industry.

“Even the boldest measures announced are likely to do no more than put the economy on ice,” Richard McGuire, a strategist at Rabobank, said.

Surveys this week showed business activity collapsed from Australia, Japan and Western Europe to the United States at a record pace in March as measures to contain the coronavirus pandemic hammered the world economy. (Reporting by Abhinav Ramnarayan, additional reporting by Yoruk Bahceli; editing by Barbara Lewis and Alexander Smith and Kirsten Donovan)

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