March 5, 2020 / 8:25 AM / a month ago

Euro zone bond yields edge higher as risk sentiment improves

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, March 5 (Reuters) - Safe-haven German government bond yields edged up from six-month lows on Thursday, reflecting a better tone in world markets as policymakers took aggressive steps to safeguard against the coronavirus outbreak.

Having tumbled almost 20 basis points in the past two weeks as coronavirus fears gripped world markets, bond investors appeared to be on pause for now, waiting for signs of likely action from the European Central Bank.

The U.S. House of Representatives overwhelmingly approved an $8.3 billion funding bill to combat the spread of coronavirus on Wednesday, sending the emergency legislation to the Senate.

This together with relief at the strong performance of former Vice President Joe Biden in the Democratic nomination campaign for this year’s presidential election lifted sentiment. Biden is considered less likely to raise taxes and impose new regulations than Democratic rival Bernie Sanders.

With 10-year U.S. Treasury yields rising back above 1% , most European bond yields also edged higher.

In early trade, Germany’s benchmark 10-year Bund yield was up 2 basis points at -0.61%, off six-month lows hit earlier this week. Most other 10-year bond yields were also around 2 bps higher on the day .

Central banks in the United States, Australia and Canada have all cut rates this week to protect their economies in the face of coronavirus.

“It’s not just the rate cut from the Fed in response to coronavirus, there’s also the funding bill. So fiscal policy is playing a part in the equation and that’s bolstered risk markets,” said Commerzbank rates strategist Rainer Guntermann.

“Europe is still waiting for a monetary policy response, whether that’s from the ECB or BOE (Bank of England).”

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

While rate-cut expectations have shot up in the euro area in the past week, an emergency ECB rate cut is seen as more complicated than in the United States because rates are already deeply negative.

According to source-based reports, the ECB is weighing options such as a targeted, longer-term refinancing operation (TLTRO) directed at small- and medium-sized enterprises in the 19-country euro zone.

Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne

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