January 30, 2020 / 8:58 AM / 2 months ago

UPDATE 3-China virus fears accelerates tumble in euro zone bond yields

* German Bund yield falls to 3-month low at -0.41%

* US 3 month/10-yr yield curve briefly inverts again

* China virus fears grip world markets (Adds money market details, updates prices)

By Dhara Ranasinghe

LONDON, Jan 30 (Reuters) - The rising death toll from a virus spreading in China sent investors scurrying for safe-haven government bonds on Thursday, pushing 10-year yields across the euro area to their lowest levels in around three months.

Several countries began isolating hundreds of citizens evacuated from the Chinese city of Wuhan in an effort to stop the global spread of an epidemic that has killed around 170.

A rising death toll and increased number of cases reported around the world have fuelled concern that China, the world's second-largest economy, may be hit hard, with repercussions for global growth.

Reflecting those worries, China's yuan tumbled in offshore markets, European stocks fell and safe-haven assets including the Swiss franc, Japanese yen and U.S. Treasuries all gained ground.

"Activity in China is being impaired whether that's factories being closed for a long period, transport being limited or people not going out so much," said Chris Scicluna, head of economic research at Daiwa Capital Markets.

"There is going to be a significant hit to growth in Q1 and that is going to have broader ramifications, for instance tourism inward and outward, will be affected."

The benchmark 10-year German Bund yield fell to a three-month low at -0.41%. French and Dutch 10-year yields hit their lowest levels since mid-October and the yields on 10-year Italian bonds sold at an auction fell to their lowest since September.

Germany's 30-year yields also fell to their lowest level in around three months, at 0.095%, meaning they are less than 10 bps away from negative yield territory once again.

Euro zone money markets priced in a greater probability of an interest rate cut by the European Central Bank by end-2020, a further reflection of economic concern.

Euro zone money markets imply a roughly 50% chance of a 10-basis-point rate cut by the end of the year, compared with around 30% earlier in the week.

"The coronavirus fallout is still generating plenty of worries for investors," Antoine Bouvet, senior rates strategist at ING, said.

"With a longer time frame in mind, we think this crisis has been a catalyst for a move lower in rates that would have happened anyway later in the year."

As 10-year U.S. Treasury yields fell to 1.55%, the lowest levels since early October, the yield curve - as measured by the gap between 10-year and three-month note yields - inverted again.

An inverted curve, when longer-dated yields fall below shorter-maturity ones, has been a fairly reliable predictor of U.S. economic recessions in the past. That part of the curve briefly inverted earlier this week.

The Chinese yuan in the offshore market, considered a barometer of risk sentiment towards Chinese assets as mainland and Hong Kong markets are shut, tumbled to a one-month low below the psychologically important 7 yuan per dollar level.

Data showing inflation in German states rose closer to the European Central Bank's near-2% target in January pushed yields off their lows, but mostly played second fiddle to the China virus. They closed at the session at lows, with the 10-year Bund down 3 basis points on the day.

Reporting by Dhara Ranasinghe in London Additional reporting by Saikat Chatterjee and Yoruk Bahceli Editing by John Stonestreet and Matthew Lewis

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