May 12, 2020 / 11:20 AM / in 17 days

UPDATE 2-Euro zone yields inch up, but investors stay cautious over new virus cases

* Investors worry about new cases as economies reopen

* German yield hits two-week high, then falls back

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds details, latest prices)

By Yoruk Bahceli

LONDON, May 12 (Reuters) - Euro zone bond yields edged higher on Tuesday as investors kept a wary eye on climbing coronavirus infection rates in China and on the risks of countries moving to reopen their economies too soon.

The Chinese city of Wuhan, where the coronavirus pandemic originated, saw its first new cases since its lockdown was lifted, adding to concern easing restrictions may cause a rise in new cases.

“... That would indicate there might be need to reverse some of the easing measures and of course that would be more restrictive regarding economic activity,” said DZ Bank rates strategist Andy Cossor.

Stocks gave back early gains, as the risks of reopening economies too soon overshadowed hopes for the beginnings of a recovery.

German 10-year bond yields rose as much as 5 basis points (bps) to a two-week high of -0.473% before falling to trade at -0.508%, up 1 bp.. Most other yields also rose 1-2 bps.

DZ Bank’s Cossor cited a break to a trendline on Bund future prices, with the future quoted below recent trends. Technical traders could see this as a negative signal for bond prices, putting selling pressure on Bunds, he said.

Italian 10-year bond yields were unchanged at 1.88%, after rising 10 bps during the previous session.

Euro zone inflation expectations fell to a near seven-week low below 0.87%, according to a key market gauge, having edged lower over the last week.

With a light data calendar in the euro zone, focus is on the primary market. Germany sold 3.256 billion euros of new seven-year bonds, while the Netherlands raised 2.2 billion euros in a re-opening of a 10-year bond.

European Central Bank’s asset purchases were also in the spotlight, after data on Monday showed it had conducted its largest weekly purchases on record.

BlackRock said it was “reviewing” its overweight position on southern euro zone debt, citing the recent German constitutional court ruling that the ECB must justify its PSPP bond purchases within three months or risk losing Germany as a participant.

The world’s largest asset manager said the decision threatened to fuel fragmentation in the euro area in the long run.

ECB executive board member Isabel Schnabel said the central bank will continue to act in the manner it sees fit, MNI News reported.

German Chancellor Angela Merkel said on Monday that the situation can be resolved if the ECB explains the plan. (Reporting by Yoruk Bahceli; Additional reporting by Tommy Reggiori Wilkes; Editing by Raissa Kasolowsky and Alex Richardson)

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