UPDATE 2-German Bund yield falls to two-week low as economic uncertainty persists

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds details on Italian bonds, comment)

By Dhara Ranasinghe

LONDON, March 30 (Reuters) – Germany’s benchmark 10-year bond yield fell to a two-week low on Monday as high-rated fixed income assets drew support from the global economic uncertainty caused by the coronavirus crisis.

As the dust appeared to settle on a month of heightened volatility and wild swings that has seen German Bund yields rise to as high as -0.14%, support for top-rated bond markets in the euro area appeared firm.

Aggressive asset purchases by the European Central Bank to support economic growth, fragile stock markets and weakness in oil prices all pointed to lower yields in euro zone benchmark issuer Germany, analysts said.

The ECB last week made its largest purchases of government bonds since its bond-buying programme started in 2015.

“For a while there was a focus on the spending implications of the coronavirus outbreak, but there is a realisation that the worst is not over for the economy,” said Nordea chief analyst Jan von Gerich. “So, focus has moved back to the economy and a view that central banks will not allow yields to rise.”

German annual inflation slowed sharply and came in below forecast in March at 1.3%, well below the European Central Bank’s target.

Meanwhile, Germany’s council of economic advisers predicted that German output could shrink by up to 5.4% in 2020.

The benchmark 10-year Bund yield fell more than 6 basis points (bps) to almost -0.55%, down 40 bps from 10-month highs hit earlier this month. Other 10-year bond yields were also lower. .

“Risk sentiment remains fragile as the virus still challenges hopes for a near return to more normal economic and social life,” said Commerzbank rates strategist Rainer Guntermann.

“The spread to the U.S. in particular is in focus with markets doubting that the Fed can also immunize the real economy,” he said, referring to the U.S. Federal Reserve.

Italian bonds continued to underperform peers, with 10-year yields last up 16 bps on the day at 1.49%, set for their worst day in nearly two weeks.

Analysts said a downgrade of Britain’s sovereign rating by Fitch on Friday had turned the focus to the weak ratings outlook for Italy and may help explain the bond sell-off.

The sell-off comes a day before Italy is scheduled to sell up to 8.5 billion euros through an auction of four bonds.

“The markets are continuing to be relatively thin in liquidity so maybe we see some adjustment ahead of tomorrow’s auction,” said DZ Bank strategist Christian Lenk.

Analysts also said continued opposition by Germany to the continued issuance of German debt given the finance minister’s comments over the weekend was adding to a risk-averse tone that put pressure on Italian bonds. (Reporting by Dhara Ranasinghe with additional reporting by Yoruk Bahceli; Editing by Kirsten Donovan and Mark Heinrich)

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