European yields extend falls as investors assess coronavirus impact

• The yield on the benchmark German Bund fell 2 basis points to -0.402pc, a three-month low.
• The gap between yields on three-month U.S. notes and 10-year Treasuries fell to -0.015 basis points.
• The market consensus is that the central bank will keep interest rates unchanged at between 1.5pc and 1.75pc.

LONDON: Euro zone government bond yields continued on Tuesday the previous day's sell-off as investors fretted about the economic impact of China's spreading coronavirus, snapping up safe-haven bonds and pushing long-term yields lower.

Meanwhile, the U.S. Treasury yield curve, measured by the gap between yields on three-month and 10-year government bonds, inverted on Tuesday for the first time since October.

An inverted curve, when longer-dated yields fall below shorter-maturity ones, has been a fairly reliable predictor of U.S. economic recessions in the past.

Investors dialled back riskier positions and bought bonds, as the death toll from the coronavirus outbreak in China rose to 109 and the virus spread to more than 10 countries.

Some investors are also betting inflation in the euro area will weaken, with market gauges of long-term inflation expectations falling to their lowest in 1-1/2-months at 1.2516pc.

In London trade, the yield on the benchmark German Bund fell 2 basis points to -0.402pc, a three-month low.

The gap between yields on three-month U.S. notes and 10-year Treasuries fell to -0.015 basis points.

Yields in most other European markets were down by a similar amount, while Italian government bond yields declined a little more to just above 1pc, also a three-month low.

"The market will continue to watch the number of how many people become infected," said Christian Lenk, rates strategist at DZ Bank said of the coronavirus.

"But the interesting part will be how much the virus and the contamination efforts of the Chinese government will finally lead to hamper supply chains and growth and that is really hard to grasp in the short term," said Lenk, adding that "if numbers don't increase exponentially there's a chance that markets will return to wait-and-see mode."

Apart from the spread of coronavirus, traders will also be watching the Federal Reserve meeting which starts on Tuesday.

The market consensus is that the central bank will keep interest rates unchanged at between 1.5pc and 1.75pc.

On top of that, Greece on Tuesday opened books for a 15-year bond issue, just days after Fitch Ratings on Friday upgraded Greece's credit rating to 'BB' from 'BB-', saying economic growth and fiscal prudence were leading to government debt remaining at sustainable levels.

Greek 10-year government bond yields fell to a fresh three-month low of 1.175pc on Tuesday, nearing the record low of 1.155pc at the end of October.