UPDATE 1-Rush to safety abates, German bond yields off record lows

* Bund yields rise from record lows

* Stimulus hopes grow

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates throughout)

By Dhara Ranasinghe

LONDON, March 10 (Reuters) – Germany’s safe-haven government bond yields rose sharply from record-low levels on Tuesday, as hopes for stimulus to support global growth in the face of the coronavirus outbreak stemmed market panic for now.

Having slid over 13 basis points on Monday in the biggest one-day drop since the euro zone debt crisis in 2011, two-year German bond yields were almost 10 basis points higher on Tuesday at -0.92% – well above record lows.

“Obviously, we had historic moves yesterday so there is a reversal of that today,” said Lyn Graham-Taylor, a rates strategist at Rababank in London. “There’s a bit more confidence out there after the Trump news and also an an element of profit- taking on the bond price gains.”

U.S. President Donald Trump said on Monday he would be taking “major” steps to gird the economy against the impact of the spreading coronavirus.

Japan on Tuesday unveiled a second package of measures worth about $4 billion in spending to cope with the fallout from the coronavirus, focusing on support to small and mid-sized firms, as concerns mount about risks to the fragile economy.

In Europe, the response to coronavirus could dominate Britain’s first post-Brexit budget on Wednesday, while the European Central Bank meeting on Thursday is expected to weigh in with measures to support the euro zone economy.

The prospect of stimulus measures bought calm to world markets after a day of panic that sent bond yields in Germany and the United States to record lows.

German government bond yields were 8 to 12 bass points higher on the day. The 10-year Bund yield was at -0.73% , almost 20 bps above Monday’s record low.

Dutch 10-year bond yields climbed 12 bps to -0.51% , also up from record lows hit the previous day, at around -0.70%.

“What we are seeing is a significant swing in sentiment and that is about fiscal policy, especially in the U.S.,” said DZ Bank rates strategist Sebastian Fellechner. “A lot of investors are awaiting fiscal policy, which in this crisis is more important than monetary policy.”

Even with yields on safe-haven bonds in Europe and the United States up sharply, the selloff appeared modest given the scale of the moves seen this year as investors brace for coronavirus to inflict a severe economic shock.

The U.S. bond curve out to 10 years has yields below 1%. U.S. 10-year Treasury yields are still more than 100 bps lower so far this year. German Bund yields are down over 50 bps.

In Italy, where the entire country has now been placed under lockdown until next month, borrowing costs fell as risk appetite globally recovered.

Italy’s 10-year bond yield fell 11 bps to 1.29%. The 10-year yield spread over Germany was back below 200 bps DE10IT10=RR.

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