Italian yields rise as investors digest coronavirus impact on markets

• Italian yields were underperforming the market, trading last up 3 basis points at 0.92pc, away from the 0.86pc low seen on Thursday.
• The virus is so far confirmed to have infected 64,000 people, overwhelmingly in China, and killed 1,400.

LONDON: After a strong rally the previous day, Italian government bonds changed course on Friday as investors reassessed the severity of the 2019-nCov coronavirus on global economic growth.

Italy led a rally in euro zone bond markets on Thursday, with 10-year yields hitting four-month lows on growing confidence that the European Central Bank will keep monetary policy easy for longer to protect the economy from the effects of the coronavirus.

But on Friday, Italian yields were underperforming the market, trading last up 3 basis points at 0.92pc, away from the 0.86pc low seen on Thursday.

The virus is so far confirmed to have infected 64,000 people, overwhelmingly in China, and killed 1,400.

A Reuters poll of economists indicated that the Chinese economy will grow at its slowest rate since the financial crisis in the current quarter under the effect of the virus.

Given that China is the world's second biggest economy, its stumble is likely to hold back growth elsewhere, prompting central banks to step in and inject further liquidity into financial markets, creating more demand for government bonds.

But the economists also said the downturn would be short-lived and the rebound quick if the outbreak was contained.

New cases outside China's Hubei region, the heart of the outbreak, declined for the 10th consecutive day on Thursday.

Yields across other euro zone markets were relatively stable, with the benchmark German 10-year Bund yield flat at -0.39pc.

Investors brushed off the fact that the German economy stagnated in the fourth quarter as both private consumption and state spending lost momentum.

"Difficulties in assessing the (coronavirus) situation have resulted in volatile, but sideways, moves in rates," said Antoine Bouvet, senior rates strategist at ING.

"Recent days have proven that the case count should be taken with a pinch of salt, as it is inherently polluted by diagnostic difficulties," said Bouvet.

He said that, once the dust settled, investors would wake up to a fairly bleak overall macro environment, "one that does not justify divesting out of fixed-income products".