March 5, 2020 / 11:43 AM / a month ago

UPDATE 3-German bond yields hit six-month lows as safe-haven bid escalates

* German Bund yield hit new 6-month low

* UST 10-year yield back below 1%

* Focus on central bank action

* Euro zone periphery govt bond yields (Updates prices for close)

By Dhara Ranasinghe

LONDON, March 5 (Reuters) - Germany’s benchmark 10-year Bund yield fell to a new six-month low on Thursday, as sentiment in stock markets soured and caution in the face of the coronavirus outbreak steered investors back to safe-haven debt markets.

Borrowing costs across the euro zone and the United States slipped as stock markets came under renewed selling pressure from more companies warning about the damage done by coronavirus.

The yield on Germany’s benchmark 10-year Bund, regarded as one of the safest assets in the world, fell to -0.68% - a six-month lows. Two-year German yields also hit a six-month low, falling to -0.86%.

Yields on most higher-rated euro zone bonds also fell 2-3 bps , but weaker southern European bonds came under renewed selling pressure.

In Italy, the country worst hit by the coronavirus, 10-year bond yield rose 6 bps at just over 1.07%. The death toll stood at 107 as of late Wednesday.

“It’s fair to say that there is a continual to-ing and fro-ing in markets over how to trade the contradictory forces of fundamental concern about the impact of coronavirus and stimulus expectations,” said Lyn Graham-Taylor, rates strategist at Rabobank.

U.S. 10-year Treasury yields were back below 1% and last down more than 6 bps on the day as U.S. shares fell around 2%.

German Bund yields have tumbled around 25 bps in the past two weeks as investors priced in the coronavirus outbreak hurting economic growth.

Investors are also waiting to see what steps the European Central Bank (ECB) will take after the United States, Australia and Canada all cut rates this week in response to coronavirus.

“Things can change fast, so never rule anything out, but we are just one week away from the (ECB) meeting, so I doubt they will act before that,” said ING senior rates strategist Antoine Bouvet.

“Even next week, I am really not sure they will cut. For one thing, there isn’t much policy space to ease. For another, there has been increased focus on the negative impact of non-standard measures, so it is a tough argument to make.”

The ECB held a conference call late on Tuesday to assess the impact of coronavirus, but policy action was not on the agenda, sources said.

While rate-cut expectations have shot up, an emergency ECB rate reduction will be complicated as rates are already negative. Instead, the bank could opt for a targeted, longer-term refinancing operation (TLTRO) directed at small- and medium-sized enterprises euro zone.

Reporting by Dhara Ranasinghe; Editing by Larry King and Alex Richardson

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