UPDATE 2-Italian bond yields jump, entire German curve negative as coronavirus hits Italy

Italy's borrowing costs jumped on Monday and the entire German bond yield curve was back in negative territory after a worsening coronavirus outbreak in Italy exacerbated concern about the outlook for the euro zone economy. A fourth person infected with the coronavirus has died in Italy, officials said on Monday as the government struggled to contain an outbreak of the illness.

In addition to Italy, a sharp rise in infections in South Korea and Iran has fuelled concern that the coronavirus outbreak in China will grow into a pandemic with disruptive and deadly consequences for countries around the world. Italy's 10-year bond yield jumped more than 8 basis points to 1.002%, its highest in over two weeks. That pushed the closely-watched gap over safer German Bund yields to almost 149 bps -- the widest since late January and up from around 134 bps on late Friday.

Other Italian bond yields were 4-8 bps higher on the day . "Italy is facing a recession now and there is a good chance of a negative economic growth number in the first quarter, but we will have to see how the virus spreads from here," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

Italy's benchmark stock index tumbled more 4% and was on course for the biggest percentage loss since June 2016. Economists at Berenberg said they had now reduced their calls for euro zone growth in the first quarter to 0.1% from 0.2% but expected most of the losses from a temporary interruption of supplies from China to be recovered later on, leaving the forecast for annual GDP growth this year unchanged at 1.0%.

"The risks to this call are tilted to the downside. The rise in Covid-19 cases in Italy to 150 over the weekend accentuates the downside risks," they said in a note. The surge of infections outside mainland China triggered steep falls in stocks as investors fled to safe havens such as gold.

In bond markets, that translated into demand for top-rated bonds such as German Bunds, U.S. Treasuries and British gilts . The yield on Germany's 10-year bond or Bund fell to -0.499%, its lowest in more than four months. The 30-year Bund fell below 0% for the first time since October , meaning the entire German yield curve was back in negative territory -- another sign that investors are bracing for a deteriorating economic outlook.

Euro zone money markets are now pricing in around a 50% chance that the European Central Bank will cut interest rates by 10 basis points in July. That is up from around 35% a week ago. The 10-year Treasury yield meanwhile tumbled more than 8 basis points to 1.377% - its lowest level since July 2016. The 30-year Treasury yield touched a new record low at 1.829%.

 

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