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Bonds News

UPDATE 2-German yields fall to 10-day low; Italy sells off as stimulus in focus

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, March 27 (Reuters) - German bond yields fell to 10-day lows and Italian yields rose on Friday as bond markets focused on monetary and fiscal solutions from the euro zone to address the economic fallout from the coronavirus outbreak.

EU leaders were unable to agree on Thursday on the scale and scope of their economic response to the coronavirus pandemic, giving themselves two more weeks to work out details in a dispute between the ailing south and fiscally conservative north.

Germany and the Netherlands blocked a call from Italy, Spain and France to issue joint debt. There was also disagreement on the timing of granting standby credit to governments via the European Stability Mechanism.

Germany’s 10-year bond yields fell to a 10-day low at -0.50%, before rising slightly to end the session at -0.48%, still down 11 basis points on the day.. Spanish and Portuguese yields fell similarly. .

German yields had risen to 10-month highs at -0.14% last week on expectations of fiscal stimulus.

They have come down since as Germany, one of the states where the ECB is thought to be approaching its self-imposed issuer limit, is expected to be one of the main beneficiaries of its removal.

“Even though there are expectations for fiscal policy, and that will have an effect on issuance, the ECB’s presence is the main driver,” said Mizuho strategist Peter McCallum.

In Italy 10-year bond yields were up 9 basis points to 1.33% . Data on Thursday showed that the number of new cases and deaths from coronavirus had risen in the country, dashing hopes for a retreat.

Despite the delay to a coordinated euro zone response to the crisis, the gap between Italy and Germany’s 10-year yields - a key gauge of credit risk on the former - is only up 30 basis points compared to late February, when the spread of the virus started to drive its bond market, at around 177 bps .

“This means absolutely no risk premia are being priced into account for the fallout from the virus,” said Richard McGuire, head of rates strategy at Rabobank.

Without the issuance of joint debt, Southern European governments will be liable for their own fiscal stimulus efforts, adding even more debt to the euro zone’s most indebted balance sheets, which has led some analysts to see the market as mispriced.

The ECB’s new programme has “the flexibility to deploy its firepower to up purchases to contain any spread widening, but it does nothing to address the structural root cause of fragmentation, which remains the lack of liability sharing,” Rabobank’s McGuire said.

While other states are accelerating their issuance plans, a rise in borrowing costs has halted Greek plans to tap bond markets again this year.

A key gauge of long-term euro zone inflation expectations rose above 0.90% for the first time in two weeks and was set to end the day at 0.95%. (Reporting by Yoruk Bahceli; Editing by Toby Chopra and Ken Ferris)

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