Government bond yields in much of the eurozone yesterday fell, before a European Central Bank (ECB) meeting widely expected to deliver new stimulus measures to help buffer the economy from the shock inflicted by the COVID-19 outbreak.
The virus, now officially a global pandemic, has sparked a lockdown in Italy, triggered turmoil across world markets and dealt a fresh blow to a weakened eurozone economy.
News that US President Donald Trump has banned travel from Europe knocked risk assets yesterday, pushing yields on safe-haven government bonds in the eurozone down 2 to 3 basis points in early trade.
Germany’s 10-year Bund yield fell to minus-0.78 percent, keeping Monday’s record low in sight.
Italian bonds sold off with other risk assets, pushing 10-year bond yields there up about 7 basis points to 1.26 percent.
Trade was subdued ahead of the ECB meeting, which came a day after the Bank of England delivered an emergency half-point rate cut.
The US Federal Reserve slashed rates last week in an unexpected move to guard its economy against COVID-19.
The ECB was expected to provide new, ultra-cheap loans for banks to pass on to small and medium-sized firms.
It was also likely to debate an interest rate cut, though that move is uncertain.
Analysts said that a collapse in eurozone market inflation expectations — exacerbated by a crash in oil prices — also raises pressure on the ECB to ramp up monthly asset purchases, currently at 20 billion euros (US$22.48 billion).
The five-year, five-year breakeven inflation forward has fallen to record lows below 1 percent, a sign that investors are starting to price in deflation risks.
The rush to own top-rated German bonds, amid heightened uncertainty, has pushed up relative borrowing costs for other eurozone states.
In Italy, the center of the coronavirus outbreak in Europe, the 10-year bond yield gap over Germany on Monday blew out 50 basis points — the biggest one-day spread widening since May 2018.
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