March 3, 2020 / 11:30 AM / a month ago

UPDATE 3-Euro zone bond yields fall after Fed rate cut

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

By Yoruk Bahceli and Dhara Ranasinghe

LONDON, March 3 (Reuters) - Euro zone government bond yields fell after the U.S. Federal Reserve cut rates in an emergency move on Tuesday, and attention turned to whether the ECB would follow suit after it indicated a readiness to protect the economy from the coronavirus outbreak.

The U.S. Federal Reserve cut interest rates by half a percentage point to 1.00%-1.25% to help shield the world’s largest economy from the virus impact.

Governments and central banks across the world are under pressure to support growth, which is suffering from coronavirus-driven travel restrictions, weakening demand, supply chain disruptions and a sharp market sell-off.

Euro zone bond yields tumbled after the Fed rate cut and German 10-year government bond yields were down 1 basis point on the day at -0.62%. They declined from highs at -0.57% hit earlier, but remained well off six-month lows at -0.67% reached in the previous session.

Italian government bonds - which bore the brunt of last week’s sell-off after coronavirus rapidly spread out of China - rallied strongly as the Fed cut boosted risk assets including stocks. Italy’s 10-year yield was down 16 bps in late trade at 0.99%; the yield was off five-week highs at 1.23% hit during the previous session, its best day in over a month.

Inflation expectations bounced over the course of Tuesday from record lows below 1.10% touched on Monday, rising above 1.15%.

Like their peers across the world, euro zone money markets have significantly ramped up their bets on a rate cut from the European Central Bank since last week.

The ECB said on Monday it was ready to take “appropriate and targeted measures” to fight the impact of coronavirus.

The central bank is also preparing possible measures to provide liquidity to businesses hit by the economic fallout of the coronavirus outbreak, according to three sources familiar with the situation.

“The jury’s out; whichever (way) you look at it, the cuts are good news for U.S. Treasuries and safe havens and that is being reflected in the sharp rally,” said Richard McGuire, head of rates strategy at Rabobank.

“One would think that this must increase the odds of an ECB rate cut...It would seem somewhat difficult that the ECB would sit on its hands against that backdrop,” McGuire said, citing rate cut expectations from the Bank of Canada and the Bank of England.

Euro zone money markets currently price over a 90% chance that the ECB will deliver a 10 bps rate cut at its meeting next week.

Following the Fed cut, Commerzbank said it now expects the ECB to trim interest rates by 10 bps next week, and temporarily raise bond purchases by 20 billion euros a month.

Euro zone consumer prices grew more slowly in February than in January, as anticipated, as the spread of the coronavirus around the world depressed oil prices. Excluding volatile prices for unprocessed food, inflation accelerated to 1.4% year-on-year from 1.3% in January.

However, the report by the EU’s statistics office had little lasting impact on bond yields, as data releases have taken the back foot given the focus on immediate coronavirus news. (Reporting by Yoruk Bahceli and Dhara Ranasinghe Editing by Mark Heinrich)

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