Coronavirus worries fuel ECB rate-cut speculation

LONDON: Italy led a rally in eurozone bond markets on Thursday, with 10-year Italian bond yields hitting four-month lows on growing confidence the ECB will keep monetary policy easy for longer to protect the economy from the fallout of coronavirus.

Bond yields across the bloc tumbled after the Chinese province at the epicentre of the coronavirus outbreak reported a record rise in the death toll under a new diagnostic method, that effectively lowers the bar for classifying new infections.

World stocks slipped, US Treasury yields fell and the euro hit its lowest level against the Swiss franc since August 2015, setting the tone for eurozone bond markets.

Italy’s 10-year bond yield tumbled over six basis points to around 0.86 per cent, narrowing the gap over safer German Bund yields to around 125 basis points - levels last seen in May 2018, just before a political crisis in Italy sparked a sharp sell off in its debt.

Analysts said higher-yielding southern european bonds were benefiting from a growing perception that the European Central Bank was likely to maintain a dovish monetary policy stance for much longer than previously anticipated given the coronavirus outbreak.

Greece’s 10-year bond yield, which fell below 1 per cent for the first time on Wednesday, extended falls to a fresh record low of 0.925 per cent.

Citigroup’s economic-surprise index for Europe has slumped to a four-month low and a sense that the US economy will prove more resilient than the euro zone’s in the face of coronavirus has hurt the euro.

“We are very bullish on the BTP spread because the ECB will keep monetary policy easy, so investors will needs assets invest in, especially ones with a positive yield,” said Mizuho rates strategist Peter Mccallum.

Italy’s cost of funding fell to new record lows at auction on Thursday, while credit rating agency Moody’s said the risk of early elections and of an exit by Italy from the euro have decreased under the coalition government led by the centre-left Democratic Party and the anti-establishment 5-Star Movement.

In a further signs that concern about the growth outlook is rising the five-year, five-year breakeven forward - a gauge of the market’s longterm eurozone inflation expectations - fell below 1.22 per cent to its lowest since early December.

Germany’s benchmark 10-year Bund yield was down 3 bps at -0.40 per cent.

“Expectation of more ECB support may well continue to help sentiment, but pricing of imminent easing has not gained much traction,” said Benjamin Schroeder, senior rates strategist at ING.

“More importantly, looking through the Covid-19 (coronavirus) outbreak reveals a picture of the economic outlook that still does not look pretty.” Investor morale in the eurozone fell for the first time in four months in February over fears that China will not be able to contain the coronavirus outbreak, a survey showed on Monday.