Euro zone bond yields falls as coronavirus death toll jumps

Eurozone government bond yields fell on Thursday, as investors flocked back to safe-haven debt markets after the Chinese province at the epicenter of the coronavirus outbreak reported a record rise in the death toll under a new diagnostic method. The new methodology effectively lowers the bar for classifying new infections, contributing to the spike in cases.

World stocks slipped, 10-year U.S. Treasury yields tumbled 5 basis points to 1.58% and the euro hit its lowest level against the Swiss franc since August 2015 as the latest developments fuelled concern about global growth. That set the tone for European bond markets, with yields on top-rated 10-year German Bund yields falling 3 bps to -0.40%.

Yields on 10-year bonds across the eurozone were 1 to 3 bps lower on the day. Concern that the spread of coronavirus will hurt the eurozone economy has weighed on inflation expectations and fuelled speculation that the European Central Bank, which cut rates in September, will have to ease monetary policy again this year.

Investor morale in the eurozone fell for the first time in four months in February over fears that China will not be able to contain the coronavirus outbreak, a survey showed on Monday. Citigroup's economic surprise index for Europe has slumped to a four-month low and a sense that the U.S. economy will prove more resilient than the euro zone's in the face of coronavirus has hurt the euro.

The five-year, five-year breakeven forward - a gauge of the market's long-term eurozone inflation expectations - has fallen around 6 bps in the past week to near its lowest levels since early December. "With macro optimism fading, the adjustment of euro breakevens with the surprise decline in survey-based measures... continues - and it probably has further to go," said Michael Leister, head of rates strategy at Commerzbank in Frankfurt.

Yields in southern Europe were also lower, suggesting investors still preferred bonds that offered a positive yield rather than just the safest bonds, such as Germany's, that are deep in negative yield territory. Greece's 10-year bond yield fell below 1% for the first time on Wednesday and held below that level in early Thursday trade.