Euro zone bond markets on steadier ground

* Euro zone periphery govt bond yields

By Dhara Ranasinghe

LONDON, Feb 25 (Reuters) – Euro zone government debt markets stabilised on Tuesday, with Italian bonds on steadier ground after suffering their worst day in over two months as Italy grappled with the worst outbreak of coronavirus in Europe.

The coronavirus death toll climbed to seven in Italy on Monday and several Middle East countries were dealing with their first infections, sending markets into a tailspin over fears of a global pandemic.

But a calmer tone emerged on Tuesday as investors awaited new developments and paused to take stock of Monday’s moves.

Italy’s 10-year bond yield, which rose 6 basis points on Monday in its biggest one-day rise in over two months, was little changed on the day at 0.97%. When a bond yield rises, the price falls.

German bond yields were also steady after falling sharply on Monday as investors rushed to safe havens.

The 10-year Bund yield hovered at -0.48%, just off more than four-month lows hit a day earlier at -0.50%.

The 30-year German Bund yield was back above 0%, after dropping back into negative territory on Monday for the first time since October.

Investors, bracing for the coronavirus outbreak to hit the world economy, were pushing up expectations for rate cuts from the U.S. Federal Reserve and European Central Bank.

Futures for the Federal Reserve funds rate have surged in the last few days to price in a 50-50 chance of a quarter-point rate cut as early as April.

Those expectations have fuelled a fall in U.S. Treasury yields, pushing the gap between 10-year Treasury and German Bund yields to near its narrowest since late 2017.

Euro zone money markets attach a more than 50% chance of a 10 bps rate cut by the ECB by July, up from around 35% a week ago.

“Pricing for some future action is fair, but that rate cuts of this magnitude, at this level, are not likely to have any effect, beyond giving the appearance that the ECB is paying attention to the potential hit to growth and acting in the only way they can,” said Tim Graf, chief macro strategist at State Street Global Advisors in London.

Data on Tuesday showed declining exports held back German economic activity in the fourth quarter of last year.

Elsewhere, Spain was expected to open the sale of a 30-year bond via a syndicate of banks.

“Despite Spain’s strong performance of late, we still expect good demand for today’s sale – some investors will probably have funds left on the side-lines waiting for long-end issuance such as this,” Mizuho analysts said in a note.

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