March 4, 2020 / 8:13 AM / 24 days ago

Euro zone bond yields hold near lows after extraordinary Fed move

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

By Dhara Ranasinghe

LONDON, March 4 (Reuters) - Government bond yields across the euro area held close to multi-month lows on Wednesday, after an emergency rate cut from the U.S. Federal Reserve failed to ease concern about the impact coronavirus will have on the world economy.

Tuesday’s surprise 50 basis point cut, the Fed’s first off-schedule move since the depths of the financial crisis more than a decade ago, came with comments highlighting both the scale of the challenge and the limits of monetary policy.

U.S. benchmark 10-year Treasury yields remained below 1% on Wednesday, having dropped below the key level in the wake of the Fed cut. That dive has pushed the gap over German Bund yields to 154 basis points — its tightest since 2016.

In early trade, Germany’s benchmark 10-year Bund yield was steady around -0.64% — near six-month lows set on Monday at around -0.67%.

It is around 10 basis points away from record lows hit last September at around -0.74% — levels that bond strategists say are likely to be tested soon.

“It does look like we’re in crisis mode,” said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

“Yesterday, the first reaction to the Fed rate cut was positive and then a view set in that if the Fed sees the need for an emergency cut, then it is quite concerned, so risk aversion has increased again.”

Indeed, yields on most higher-rated bonds in the euro area remained near multi-month lows in a sign of the pessimism prevalent in bond markets.

Focus also turned to what the European Central Bank will do in the face of the coronavirus shock to the economy.

And while expectations for a rate cut as soon as next week’s policy meeting have shot up, the ECB is more likely to opt for other policy measures, economists said.

The most prominent measure under discussion at the ECB is a targeted longer-term refinancing operation (TLTRO) directed at small- and medium-sized enterprises in the 19-country euro zone, who may be hit hardest by the downturn, sources told Reuters on Tuesday.

Speculation about such measures have helped support southern European bond markets, such as Italy - which is battling to contain a coronavirus outbreak.

Italy’s 10-year bond yield was a touch higher at 1.02 % , having tumbled 17 bps on Tuesday in its biggest one-day drop in five weeks.

Reporting by Dhara Ranasinghe, Editing by William Maclean

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