UPDATE 3-Dovish ECB pushes German 10-year yield further below zero, Italy yields jump

* German Bund yield tumbled to -0.06 pct * ECB’s Draghi says rate hike timing can be delayed further * Talk about tiered rates for banks grows * Italian bond yields jump on growth worries * Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with German Bund auction, Italy bond moves) By Dhara Ranasinghe LONDON, March 27 () – Germany’s long-dated borrowing costs hit 2-1/2-year lows below zero percent on Wednesday after the European Central Bank said it could further delay a rate rise if needed and look at measures to offset the impact of negative interest rates. The ECB’s dovish tone failed to cheer Italian bond markets and yields there shot higher, with investors unnerved by reports that Italy’s growth forecast may be slashed again. That provided another reason to pile into safe-haven bond markets such as Germany’s, now on track for its best month in two years. “There were a couple of articles about Italy being unable to tighten fiscal policy given its weak economy and a story about the cut in growth rates and that’s helped a flight to quality,” said Richard McGuire, head of rates strategy at Rabobank. “The market is also jittery because the pronounced shift by central banks recently has done more to accentuate than calm market concern about the growth outlook.” Overnight New Zealand joined the chorus of central banks turning markedly dovish, saying its next rate move was more likely to be a cut. Germany’s 10-year bond yield fell over four basis points to a low of minus 0.06 percent and is roughly 15 bps away from record lows hit in 2016. It sold 2.4 billion euros of 10-year bonds with an average yield of minus 0.05 percent. In a sign that investors are moving further up the curve in search of some yield, 30-year German yields fell to 0.52 percent , also their lowest since late 2016. French and Dutch 10-year bond yields hit 2-1/2-year lows , Spain’s 30-year bond yield fell to a one-year low at 2.19 percent. “The bond market reaction is not necessarily consistent with the ECB executing a lower for longer rates policy but more consistent with it moving into a return of asset purchases,” said Peter Chatwell, head of rates at Mizuho. Reflecting worries that the ECB will be unable to meet its near 2-percent inflation target, a key long-term gauge of euro zone inflation expectations fell to 1.35 percent — down 12 bps in the past week. In contrast, Italy’s 10-year yield was up six bps at 2.53 percent. The Italian/German yield gap hit its widest in over three weeks at 260 bps. TALKING (TIERED) RATES Analysts said Draghi’s comments had also boosted talk that the ECB may be considering steps such as a tiering of interest rates to ease pressure on banks. Addressing complaints from banks that negative rates are hurting bank lending, Draghi said the ECB would look at whether mitigating measures are needed but said that negative weak profits are not an automatic result of low rates. “Certainly this headline has made an impact (on bank stocks). There is this story of tiering doing the rounds,” said Giuseppe Sersale, strategist at Anthilia Capital in Milan. Euro zone banking stocks were last up 0.9 percent. Reporting by Dhara Ranasinghe, Additional reporting by Sujata
Rao, Danilo Masoni and Virginia Furness; editing by Angus
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