UPDATE 2-Euro zone bond yields steady as caution prevails

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds Belgium syndication)

By Dhara Ranasinghe

LONDON, Feb 17 (Reuters) – Government bond yields in the euro area were mostly steady on Monday, reflecting a strong degree of caution as markets assess the damage inflicted on the world economy by the coronavirus outbreak.

Initially, borrowing costs across the bloc had risen as the latest efforts by Chinese authorities to cushion the blow from the coronavirus supported sentiment in world markets.

China on Monday lowered one of its key interest rates and at the weekend said it would roll out targeted and phased tax and fee cuts to support the world’s second-biggest economy.

Germany’s 10-year bond yield was steady at -0.40% , having risen to -0.378% earlier. Most other 10-year yields in the euro area were also flat after rising by between 1 and 2 basis points in early trade.

Having risen on Friday, Italy’s 10-year yield was down 2 bps basis points at 0.90%.

“The Chinese measures have given sentiment a bit of a lift,” said DZ Bank rates strategist Andy Cossor. “There is still considerable uncertainty out there in terms of coronavirus.”

Trade was also subdued, with U.S. markets closed for a public holiday and as investors waited for the “flash” euro zone Purchasing Managers’ Index, a forward-looking indicator due later this week, for a first readout on the coronavirus impact.

Data on Monday showed Japan’s economy shrank at the fastest pace in almost six years in the December quarter, raising the risk of a recession as the coronavirus outbreak chills global activity.

Worries about the euro zone economic outlook have pushed the euro to its lowest levels in almost three years, while a key market gauge of long-term inflation expectations has tumbled and Citi’s euro zone economic surprise index is at its lowest since November.

Focus also turned to a meeting of euro zone finance ministers on Monday for any signs that the bloc will loosen fiscal policy to shore up its economy.

Euro zone governments are set to agree a more growth-friendly policy, a change from current targets that would pave the way for more spending in Germany amid fears of a downturn.

Repeated attempts to boost investment and growth have failed as Germany, the euro zone’s largest economy, kept posting large budget surpluses despite calls to spend more.

But with recession fears gripping Germany and the coronavirus outbreak denting the outlook for world growth, expectations for increased spending have risen.

The EU document that is expected to be adopted on Tuesday stresses that higher spending would need to comply with EU fiscal rules, which mandate deficits below 3% of gross domestic product, among other requirements. It is also not clear how the euro zone defines a downturn that would trigger more expansionary policies.

“Hopes are high that the Eurogroup will at least pay lip service to fiscal policy pulling more weight,” said Commerzbank rates strategist Michael Leister. “Reading between the lines in tonight’s statements will be key.”

Elsewhere, Belgium hired a syndicate of banks to sell a 20-year bond, according to a lead manager notice seen by Reuters.

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