UPDATE 1-Euro zone bond yields hold near lows as caution prevails

* German Bund yield heads back towards six-month lows

* UST 10-year yield back below 1%

* Focus on central bank action

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to reflect change in market direction)

By Dhara Ranasinghe

LONDON, March 5 (Reuters) – German bond yields held near recent six-month lows on Thursday, as stock markets soured and caution in the face of the coronavirus outbreak steered investors back to safe-haven debt markets.

Borrowing costs across the euro area had edged up in early trade as risk sentiment recovered overnight. But they soon headed back down after stock markets came under renewed selling pressure from more companies warning about the damage done by coronavirus.

The yield on Germany’s benchmark 10-year Bund, regarded as one of the safest assets in the world, was steady at -0.64% — back within sight of six-month lows hit Monday.

Most other 10-year bond yields in the euro area were lower on the day, although Italy’s 10-year bond yield rose to 1.03%.

U.S. 10-year Treasury yields were back below 1%.

German yields have fallen roughly 20 bps in the past two weeks as investors priced in the coronavirus outbreak hurting economic growth.

Investors are also waiting to see what steps the likes of the European Central Bank will take to contain the fallout.

“Europe is still waiting for a monetary policy response, whether that’s from the ECB or BOE (Bank of England),” said Commerzbank rates strategist Rainer Guntermann.

The United States, Australia and Canada have all cut rates this week in response to coronavirus.

The ECB held a conference call late on Tuesday to assess the impact of coronavirus, but policy action was not on the agenda, sources said.

While rate-cut expectations have shot up in the euro area in the past week, an emergency ECB rate looks more complicated than it was for the United States, because rates are already negative.

According to source-based reports, the ECB is weighing options such as a targeted, longer-term refinancing operation (TLTRO) directed at small- and medium-sized enterprises in the 19-country euro zone. “Things can change fast, so never rule anything out, but we are just one week away from the (ECB) meeting, so I doubt they will act before that,” said ING senior rates strategist Antoine Bouvet.

“Even next week, I am really not sure they will cut. For one thing, there isn’t much policy space to ease. For another, there has been increased focus on the negative impact of non-standard measures, so it is a tough argument to make.”

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