Euro zone bond yields tumble as risk sentiment picks up

Euro zone bond yields tumbled on Friday as risk sentiment picked up to support Southern European bonds, while German bonds retraced some of their losses from the previous session. Asian shares recovered somewhat on Friday following this week's rout and European shares were set for their second straight session of gains as more countries took monetary and fiscal measures to cushion the economic impact of the coronavirus.

Norway's central bank became the latest to cut rates while China was set to unleash trillions of yuan of fiscal stimulus to revive its economy. Italian bond yields were lower, with the 10-year yield last down 17 basis points at 1.65%, after falling nearly 50 bps on Thursday.

The European Central Bank's 750 million-euro emergency bond purchase scheme, announced on Wednesday, has boosted Southern European debt, alleviating some concern over how already heavily-indebted states would finance the fiscal measures needed to defend against coronavirus. Spanish and Portuguese yields also fell, with 10-year yields down around 11 bps each .

"We have bonds and stocks moving in lockstep...it's clearly a sign of optimism being regained in the market," said ING senior rates strategist Antoine Bouvet. "It's a sign that central bank intervention is baring fruit."

German Bunds - a safe haven that would sell off when risk sentiment picked up in normal times - also rallied. 10-year yields slid 12 bps to -0.29%, after touching over 10-month highs on Thursday at -0.14%.

Peter McCallum, rates strategist at Mizuho, said this was a relatively modest move reversing some of Thursday's sell-off, when the yield hit more than 10-month highs after an official with knowledge of Germany's plans said it plans to declare an exception to its constitutional debt brake, which limits the amount of debt it can issue. Bunds have also been under pressure this week as investors sold safe-haven assets to make up for losses elsewhere, meaning that they have sold off together with riskier assets.

10-year bond yields are up more than 30 bps this week, set for their worst week since June 2015. "We can expect that after a while confidence will return to this market and return to safe-haven status and their diversification advantage," ING's Bouvet said of sovereign bonds.