UPDATE 2-German Bund yield rises as risk sentiment improves

Germany's benchmark 10-year Bund yield touched its highest level in 10 days on Thursday after China said it would halve tariffs on some U.S. imports, boosting hopes the world economy may be able to avoid a major shock from the coronavirus outbreak. Comments from European Central Bank President Christine Lagarde that the euro zone economy is stabilising added to the upward pressure on bond yields.

Yields across the euro area rose on Wednesday on expectations that the virus outbreak in China could be contained and that a cure could be found. China said on Thursday it would halve additional tariffs levied against 1,717 U.S. products last year.

That reciprocates a U.S. commitment under a recently signed trade deal between the United States and China, but analysts also saw it as a move by Beijing to boost confidence amid the virus outbreak, which has hurt the economy and investor sentiment. Germany's Bund yield rose to -0.339%, its highest level since Jan. 27, before pulling back to -0.358% - still 1.2 basis points higher on the day.

Most other 10-year bond yields in the currency bloc were slightly higher on the day. "The tariff news adds to the risk-on sentiment," said DZ Bank rates strategist Rene Albrecht. "The spillover from coronavirus has not been seen in the West yet, so it doesn't look like it's spreading too much and economic performance shouldn't drop significantly going forward."

After falling 26 bps in January as coronavirus fears gripped markets, Bund yields were up 8 bps this week and set for their biggest weekly jump since November. The economic impact of the coronavirus outbreak may be temporary, limiting the need for policy action, European Central Bank executives said on Wednesday.

Greece's 10-year government bond yield, however, touched a new record low on Thursday, a move analysts put down to news that the euro zone bailout fund had waived Cyprus' mandatory repayment obligation of loans. Yields on the Greek 10-year bond fell more than 4 basis points to 1.143%, a new record low, and were last down by 3.2 bps at 1.149%.

Euro zone growth remains modest, but there are signs of stabilisation, the ECB's Lagarde told the European Parliament's committee on economic affairs on Thursday. Upward pressure on euro zone bond yields also appeared to ebb after French and Spanish bond auctions.

France sold almost 9 billion euros ($9.9 billion) of long-dated bonds, while Spain auctioned almost 5 billion euros of debt. "We see a reasonable chance that yields will continue to increase towards the end of this week, irrespective of the general market mood, which remains to be determined by the general perception of the threat stemming from 2019-nCoV (coronavirus)," UniCredit analysts said in a note.

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