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UPDATE 1-Italian yields plummet as markets bet ECB will act against coronavirus
* Yield of government bonds from the periphery of the euro area tmsnrt.rs/2ii2Bqr (Redesign to lead with Italy)
By Dhara Ranasinghe
LONDON, March 4 (Reuters) – Italy on Wednesday led a decline in bond yields in southern Europe as investors bet that the European Central Bank will be encouraged to take action to protect the country. Eurozone economy against the coronavirus outbreak.
The ECB’s governing council held a teleconference on Tuesday to assess the impact of the coronavirus, but no political action was on the agenda, two sources told Reuters.
Money markets are now positioned to drop 10 basis points at the ECB meeting next week.
But with a rate cut seen as having limited impact, other policy options are on the table.
Sources told Reuters on Tuesday that the envisaged possible measures include a targeted longer-term refinancing operation (TLTRO) targeting small and medium-sized enterprises in the euro area of 19 countries, which could be hardest hit by the recession.
Speculation about these measures has supported bond markets in southern Europe, such as Italy – which is struggling to contain an epidemic of coronavirus.
Italian 10-year bond yields fell seven basis points to 0.913%, their lowest level in nearly two weeks. It tumbled 17 basis points on Tuesday during its biggest one-day drop in five weeks.
Spanish and Portuguese 10-year bond yields fell by 3 to 4 basis points.
"The view that the ECB could intervene with certain measures is clear," said Peter Schaffrik, global macro strategist at RBC Capital Markets. "I don't think they will do anything before next week's meeting."
British 10-year rates fell to a record low around 0.34%, a sign that investors have also positioned themselves for a cut in short-term rates by the Bank of England.
On Tuesday, the US Federal Reserve recorded a surprise drop of 50 basis points, its first off-schedule movement since the global financial crisis more than ten years ago.
US 10-year Treasury yields remained below 1% on Wednesday, after falling below the key level after the Fed fell. This dive widened the spread on German Bund yields to 154 basis points, its narrowest since 2016.
The benchmark 10-year German Bund yield only increased 1.5 basis points over the day to -0.63%, remaining close to the six-month lows set on Monday.
It stands at around 10 basis points from the record lows reached last September at around -0.74%, according to analysts, who should be tested soon.
"It looks like we're in crisis mode," said Daniel Lenz, rate strategist at DZ Bank in Frankfurt.
"Yesterday, the first reaction to the Fed's rate cut was positive, and then an opinion was expressed that if the Fed sees the need for an emergency cut, it is very worried , so risk aversion has increased again. "
Report by Dhara Ranasinghe, edited by William Maclean and
Toby Chopra
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