March 11, 2020 / 8:50 AM / a month ago

UPDATE 2-Respite for Italian bonds as ECB stimulus bets swell

* Italian yields drop 10 to 17 bps across the board

* Markets fully price in ECB rate cut for Thursday

* Short-dated Gilt yields drop after BoE cut

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By Abhinav Ramnarayan

LONDON, March 11 (Reuters) - Italian government bond yields fell sharply from recent highs on Wednesday, on expectations the European Central Bank will boost monetary stimulus when it meets on Thursday to counter the impact of the coronavirus outbreak on the European economy.

Following a 50-basis point rate cut from the Bank of England, expectations are the ECB will also act, probably with a 10-basis point cut. Money markets showed that a 10-basis point rate cut is now being fully priced in by investors.

Italian government debt is seen as the biggest beneficiary from the cut, which would take interest rates in the bloc deeper into negative territory.

“It’s clear that the Italian situation is dire but as it’s been proven in the past the ECB has proven the most important driver of the Italian spread,” said Ross Hutchison, rates fund manager at Aberdeen Standard Investments.

He added there was a lot of pressure on the central bank to step up efforts, especially on quantitative easing.

Italian government bond yields were down between 10 and 17 basis points across the board, coming off recent highs. The benchmark 10-year government bond yield was down 14 basis points at 1.19%, well off Tuesday’s two-month high of 1.458%. The spread over German debt tightened to 194 bps, from Tuesday’s 227 bps.

Germany’s two-year bond yield dropped one basis point to -0.947%, tracking short-dated Gilt yields lower following an emergency base rate cut by the Bank of England (BoE).

The BoE’s move has further raised expectations on the ECB, and DZ Bank strategist Daniel Lenz sees a “reasonable chance of a rate cut”.

Benchmark 10-year German debt, on the other hand, rose nearly five basis points to -0.755%, as bearish sentiment eased a touch. Most other high-grade euro zone government bond yields were also higher on the day., (Reporting by Abhinav Ramnarayan; Editing by Larry King, John Stonestreet and Alex Richardson)

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