March 10, 2020 / 11:06 AM / 25 days ago

UPDATE 3-Rush to safety abates, German bond yields off record lows

* Bund yields rise from record lows

* Stimulus hopes grow

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds inflation expectations hitting record low)

By Dhara Ranasinghe

LONDON, March 10 (Reuters) - Germany’s safe-haven government bond yields rose sharply from record-low levels on Tuesday, as oil prices bounced 7% and hopes for stimulus to support global growth in the face of the coronavirus outbreak helped stem market panic.

Having slid over 13 basis points on Monday in the biggest one-day drop since the euro zone debt crisis in 2011, two-year German bond yields rose as much as 10 basis points at one point at -0.92% - well above record lows. They eased to 0.94% towards close of trade.

“Obviously, we had historic moves yesterday so there is a reversal of that today,” said Lyn Graham-Taylor, a rates strategist at Rababank. “There’s a bit more confidence out there after the Trump news and also an element of profit-taking on the bond price gains.”

U.S. President Donald Trump said on Monday he would be taking “major” steps to gird the economy against the impact of the spreading coronavirus.

Japan on Tuesday unveiled a second package of measures worth about $4 billion in spending, focusing on support to small and mid-sized firms.

Europe’s response to coronavirus could dominate Britain’s first post-Brexit budget on Wednesday, while the European Central Bank meeting on Thursday is expected to weigh in with measures to support the euro zone economy.

The prospect of stimulus measures bought calm to world markets after a day of panic that sent bond yields in Germany and the United States to record lows.

German government bond yields were 8 to 12 basis points higher on the day. The 10-year Bund yield slipped to -0.7% , almost 20 bps above Monday’s record low. They inched lower as the day wore on, to trade 5 bps up on the day at 0.8%

Dutch 10-year bond yields climbed 6 bps to -0.57% , well off Monday’s record lows around -0.70%.

“What we are seeing is a significant swing in sentiment and that is about fiscal policy, especially in the U.S.,” said DZ Bank rates strategist Sebastian Fellechner.

But while yields on safe-haven bonds are off their lows, investors are still bracing for a severe economic shock — a gauge of euro zone inflation expectations plumbed a new record low at 0.92% while U.S. and German 10-year yields are down 100 bps and 50 bps respectively this year.

Italian borrowing costs also fell as the country was placed under lockdown until next month, but 10-year yields which tumbled 11 bps at one point, gradually rose and stood two bps down on the day towards close at 1.39%.

Ten-year yield spreads over Germany, a measure of Italy’s risk premium, rose back above 200 bps.

Reporting by Dhara Ranasinghe Editing by Mark Heinrich, William Maclean

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