January 23, 2020 / 10:07 AM / a month ago

UPDATE 1-Euro zone bond yields fall on China virus fears, ECB meeting looms

* Bond yields at multi-week lows on China virus worries

* ECB set to launch key policy review

* SNB chief says negative rates a necessity

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout, adds charts, comment)

By Dhara Ranasinghe

LONDON, Jan 23 (Reuters) - Government bond yields across the euro area fell to their lowest in weeks on Thursday as worries grew about the spread of a deadly virus in China, although trade was largely subdued ahead of the European Central Bank’s first policy meeting of 2020.

Italian borrowing costs tumbled to five-week lows as initial concern following the resignation of Luigi Di Maio as leader of Italy’s co-governing 5-Star movement on Wednesday gave way to a view that an imminent collapse of the ruling coalition was unlikely.

Anxiety in world markets about the spread of a new flu-like virus in China just as millions prepared to travel for the Lunar New Year holiday bolstered demand for higher-rated bonds.

“What’s essentially happening in bond markets is about China and concerns about coronavirus spreading,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Germany’s benchmark 10-year Bund yield fell 2.5 basis points to a two-week low around -0.29%, while French 10-year yields fell to a six-week low at -0.039%.

Comments from Swiss National Bank Chairman Thomas Jordan that negative rates were a necessity for the country added to downward pressure on bond yields.

The Swiss 10-year bond yield was last down seven bps at -0.70%, its lowest level since October.

ECB DAY

Trading activity was generally subdued ahead of the ECB meeting and central bank chief Christine Lagarde’s news conference.

“It’s all about the review,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

“Anything that gives clarity about the timing and structure would be helpful.”

Lagarde is expected to announce the start of the ECB’s first strategic review since 2003, which will last for most of the year and span topics from the inflation target to digital money and the fight against climate change.

The ECB has failed to meet its near 2% inflation target for years, even after aggressive monetary stimulus.

A key market gauge of long-term euro zone rate expectations fell to its lowest level in around five weeks at 1.3015% ahead of the ECB meeting.

Bond markets would also pay attention to how the ECB views the economic outlook, analysts said, given some signs that the worst may be over for the bloc’s economy.

“There is some speculation that they (the ECB) could change the risk assessment but that could be nuanced,” said Rabobank rates strategist Lyn Graham-Taylor.

Elsewhere, Italy’s 10-year bond yield fell 6 bps to 1.29% , having touched a five-week low at 1.27%.

Di Maio’s resignation as 5-Star leader on Wednesday had initially sparked some selling in the Italian bond market but that soon reversed as investors concluded the move would not lead to a collapse of the coalition government.

Reporting by Dhara Ranasinghe Editing by Philippa Fletcher and Peter Graff

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