May 15, 2020 / 11:13 AM / 10 days ago

UPDATE 2-Euro zone bond yields steady; Lagarde to join Eurogroup meeting

* Euro zone periphery govt bond yields (Updates prices, adds details)

By Elizabeth Howcroft

LONDON, May 15 (Reuters) - Core euro zone bond yields were steady on Friday, largely disconnected from swings in global risk appetite, before a key meeting between euro area finance ministers.

Moves on most euro zone bonds were subdued, while stocks came under pressure on signs of deteriorating trade relations between the United States and China. The Trump administration moved on Friday to block shipments of semiconductors to China’s Huawei Technologies from global chipmakers.

Euro zone finance ministers were meeting on Friday afternoon via teleconference to discuss pan-European fiscal measures designed to mitigate the economic fallout from the coronavirus pandemic, with European Central Bank President Christine Lagarde in attendance.

German Finance Minister Olaf Scholz said ahead of the meeting that a pan-European fund is needed to restart Europe’s economy after coronavirus lockdowns. The European Commission - the EU’s executive - will propose a recovery package later this month.

“We remain doubtful as to the impact of this fund both owing to likely over-optimistic expectations of private-sector involvement ... and the low probability that much of this funding will be on an unrequited basis in the form of grants rather than loans,” Rabobank analysts told clients prior to the German announcement.

Christoph Rieger, head of rates and credit research at Commerzbank, said that there are probably some hopes for an agreement on other elements of the package on Friday, such as loans to protect workers and a business support fund.

Germany’s 10-year government bond yield was up 1 basis point in late trade to -0.53%.

Riskier Italian government bond yields rose, led by the short-end, last up 7 bps to 0.77%.

The spread between Italian and German 10-year government bond yields widened by around 7 bps to 237 bps.

The German economy plunged into a recession after suffering its worst quarterly contraction since the 2009 financial crisis, according to preliminary gross domestic product data, and a deeper slump is expected in the second quarter.

The euro zone economy is expected to shrink by 11.3% between April and June, according to economists polled by Reuters.

Economists also expect the European Central Bank will ramp up bond buying next month.

Commerzbank’s Rieger said the correlation between bonds and equities has lessened, with bond yields not reacting as much to changes in risk appetite.

“I think this is limiting the downside in the risk-off days,” he said.

Ratings agency Fitch is due to review France and Austria on Friday for the first time since the coronavirus reached Europe.

“Fitch has by far been the most pro-active agency in terms of corona-related rating adjustments of EU sovereigns so far ... Thus, at least Austria’s positive outlook appears at risk,” Commerzbank analysts told clients.

Reporting by Elizabeth Howcroft Additional reporting by Yoruk Bahceli Editing by Larry King and Frances Kerry

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