Euro zone bond yields edge up as China takes more steps to support economy

* Euro zone periphery govt bond yields

LONDON, Feb 17 (Reuters) – Government bond yields in the euro area inched up on Monday as efforts by Chinese authorities to cushion the blow from the coronavirus outbreak 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.

Those measures lifted sentiment in stock markets, denting demand for fixed income.

In early Monday trade, most 10-year bond yields were around 1-2 basis points higher on the day — a modest move that also suggested a strong dose of caution among bond investors.

Germany’s benchmark 10-year Bund yield traded at -0.39% , continuing to hold a tight range.

“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 investors waited for the “flash” euro zone Purchasing Managers’ Index, a forward-looking economic indicator due out later this week, for a first read on how coronavirus is impacting the economy.

Data on Monday showed Japan’s economy shrank at the fastest pace in almost six years in the December quarter as a sales tax hike hit consumer and business spending, raising the risk of a recession as China’s coronavirus outbreak chills global activity.

A meeting of euro zone finance ministers on Monday was also in focus 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 fiscal policy, three EU officials told Reuters earlier this month, 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 in past years 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 fiscal spending have risen.

“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.” (Reporting by Dhara Ranasinghe, Editing by William Maclean)

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