The Covid-19 pandemic causes a “perfect” stir in the European bond market

As the Coronavirus rapidly balloons into a pandemic, the EU markets are reeling from the risk aversion storm. Investors are fast eliminating any risky assets from their portfolio and are instead falling back on state bonds. The Germany bond, is especially a target for European Union investors, for safety purposes, while anticipating a boost by the European Central Bank.

Earlier this week, the peripheral euro-area bond yields plummeted with Italy recording the highest number of cases in the region, escalating fears of a possible downturn.

Compared to the past week, money markets are currently pricing in a 30% probability of a 10-basis-points rate reduction this month, even as a full rate cut is expected in September this year.

A statement by the World Health Organization stated that Coronavirus is fast disrupting the global economy and likely to hurt major markets if the current situation remains the same.

While referring to massive shifts from risky to safe assets, Marco Meijer, a senior rates strategist at BNP Paribas SA, said: “It is a proper flight to quality now. Return of capital is now more important than return on capital.”

The 10-year German bond yield fell below the -0.50% overnight deposit rate of the central bank, after a -0.55% drop. Meijer said that the reduction signifies the market is expecting a rate cut soon.

In an interview published by the Financial Times, European Central Bank president Christine Lagarde said the regulator is closely monitoring the impact of the virus and that it is yet to reach the point where it requires a monetary policy response.

Last week the Markit iTraxx Europe Crossover Index of credit-default swaps on high-yield companies jumped to record high since August last year, with Italy’s 10-year yield premium widening over German by a high of 166 basis point from 16, marking the highest in over a month.

“Scared is the appropriate way to describe equity and credit markets. Credit risk premia are widening in all markets, which is causing a repricing of peripheral spreads,” Peter Chatwell of Mizuho International Plc said.

The UN yesterday reported that the Coronavirus menace is likely to cost the global economy over £1.5 trillion in 2020 alone. However, Richard Kozul-Wright, Director, Division on Globalization and Development Strategies at UNCTD, stated that few countries could be left unscathed by the outbreak’s financial ramification.