* Calm descends after days of heightened volatility
* Inflation expectations at record lows
* Euro zone periphery govt bond yields – tmsnrt.rs/2ii2Bqr (Adds latest developments on issuance, updates prices)
By Dhara Ranasinghe
LONDON, March 23 (Reuters) – The euro zone’s bond markets steadied on Monday after days of heightened volatility as investors assessed the impact of massive fiscal and monetary stimulus to contend with the impact from the coronavirus pandemic.
Germany’s debt agency unveiled a drastic expansion of its debt issue plans for this year, aiming for additional proceeds of 32.5 billion euros ($35 billion) in the second quarter alone.
The news had little immediate impact on a market that has been bracing for higher spending and bond issuance. Germany on Monday agreed a package worth up to 750 billion euros to mitigate the damage of the coronavirus outbreak on Europe’s largest economy, with Berlin aiming to take on new debt for the first time since 2013.
However, the country is not planning to launch any new debt instruments such as a 50-year bond, which would have enabled it to take better advantage of historically low borrowing costs.
Helping to counter upward pressure on yields from increased supply is a rise in asset purchases, announced by the European Central Bank last week.
The European Central Bank bought the most government debt in 2-1/2 years last week, helping fuel a rebound in bonds issued by Italy and other coronavirus-stricken countries struggling on the funding market.
“European government bonds should find support in the tug of war between giant supply prospects and massive central bank buying,” said Commerzbank rates strategist Rainer Guntermann.
And as stock markets took another beating on Monday, safe-haven bond yields in Germany and the United States fell.
That came after higher-rated bonds sold off alongside riskier assets such as stocks last week in a highly unusual pattern, as investors sold liquid assets to make up for losses elsewhere.
The 10-year Bund yield last traded down 5 basis points to -0.39%, around 25 bps lower than last week’s 10-month highs.
It followed U.S. Treasury yields, which fell after the U.S. Federal Reserve unleashed fresh measures to shore up the economy. The Fed said it would begin backstopping an unprecedented range of credit for households, small businesses and large employers.
“It’s true, we’ve had a lot of volatility and the ECB’s announcement had a lot of impact last week, especially on peripheral bond markets,” said Cyril Regnat, head of research solutions at Natixis.
“The dust is definitely settling and we come back to a context which is characterised by a flight to quality.”
Italian 10-year borrowing costs were also on steadier ground after last week’s wild swings.
Elsewhere, the five-year, five-year breakeven inflation forward – a key market gauge of long-term inflation expectations in the euro area – fell to a record low around 0.71%, dragged down by weak oil prices.
The bleak outlook for inflation was one more reason to expect some support for bond markets going forward in spite of recent volatility, analysts said.
In the primary market, Spain has hired a syndicate of banks to sell a seven-year bond, according to Refinitiv IFR. The sale follows a five billion euro auction last week that was supported by the announcement of the ECB’s emergency measures. ($1 = 0.9279 euros) (Reporting by Dhara Ranasinghe; additional reporting by Yoruk Bahceli Editing by David Goodman and Andrew Heavens)
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