Euro zone yields steady as slowing spread of virus lifts sentiment

By Olga Cotaga

LONDON (Reuters) - Euro zone government bond yields stabilised on Wednesday as investors welcomed signs that the spread of the coronavirus in China was slowing and that more economic stimulus to offset the fallout could be on its way.

China reported 1,749 new confirmed cases of coronavirus infections, the lowest daily rise since Jan. 29, as the death toll passed 2,000.

Investors are concerned about how the outbreak will impact supply chains in the world's second-biggest economy and what effect it will have on inflation and monetary policy.

Germany's 10-year benchmark yield <DE10YT=RR> initially fell to -0.42%, near to Tuesday's two-week low of -0.43%. The rest of the euro zone market followed suit before yields recovered as sentiment across asset classes improved.

The German 10-year bond last yielded -0.414%, unchanged on the day.

Still, analysts say many yields are struggling for direction.

"We hear from our clients that they are not buying right now because they are waiting for a better pick up in yield," said Rene Albrecht, a rates strategist at DZ Bank in Frankfurt. "Everyone in the market is looking for direction."

Chinese policymakers have implemented a raft of measures to support an economy sharply affected by the outbreak, which is expected to erode first-quarter growth. Europe relies heavily on Chinese economic growth.

Firms in China's virus epicentre of Hubei province will not have to pay pensions and benefits until June. A Bloomberg report said China is mulling cash injections or mergers to bail out airlines.

Germany's finance minister and his counterparts in the bloc have said they would be ready to spend more if a downturn hits its economy.

Rates in Europe took guidance from comments coming from U.S. policymakers, including Dallas Federal Reserve Bank President Robert Kaplan.

Kaplan repeated his view on Tuesday that the current setting of U.S. interest rates is "roughly appropriate" through the end of this year, even as he noted risks from the flu-like epidemic that has brought parts of China to a halt.

French <FR10YT=RR> and Spanish <ES10YT=RR> government bonds were also little changed on the day.

The Italian 10-year yield stood at 0.926% <IT10YT=RR> while the 10-year Greek government bond yield remained below 1% and was last at 0.968% <GR10YT=RR>.

(Reporting by Olga Cotaga; Additional reporting by Tommy Reggiori Wilkes; Editing by Helen Popper and Mike Harrison)