UPDATE 1-Euro zone bond yields fall on negative rate talk in UK

* Bond yields fall with UK gilts

* BoE’s Haldane comments stoke talk of negative UK rates

* Fitch changes French ratings outlook to negative

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts to lead with broader move down in euro zone bond yields)

By Dhara Ranasinghe

LONDON, May 18 (Reuters) – Euro zone government bond yields fell on Monday, pulled lower with British gilt yields on growing speculation that Britain may be next to push interest rates below 0%.

Italy’s bond market, where yields fell over 4 basis points as prices rose, was also boosted by a rally in stock markets amid a loosening of coronavirus shutdowns and signs of strong demand for a new BTP Italia bond on sale from Monday.

Britain was in the spotlight as money markets ramped up expectations it would adopt negative interest rates for the first time ever, after Bank of England chief economist Andy Haldane said the central bank was looking more urgently at options such as taking rates below 0%.

Earlier this month, U.S. Fed funds futures, for the first time ever, reflected a small chance that a negative rate policy will find its way to U.S. shores — a prospect U.S. Federal Reserve officials have played down.

“Haldane’s comments have, unsurprisingly, seen Gilts open with a bid tone, which, in turn is supporting core Europe even as risk appetite remains in the ascendant,” said Richard McGuire, head of rates at Rabobank in London.

“Negative rates are plausible on both sides of the Atlantic we would wager as exploding debt stocks will only be manageable through constrained borrowing costs.”

Germany’s 10-year bond yield was last down 1.5 basis points on the day at -0.54%. Yields on other higher-rated euro zone issuers were down a similar amount.

French yields, which had faced some upward pressure after Fitch Ratings lowered its ratings outlook, headed back down . Fitch on Friday lowered its outlook on France’s AA rating to negative from stable, citing worsening public finances and economic activity due to the coronavirus.

Britain’s two-year bond yields, often viewed as an indicator of where official rates are headed, were 4 bps lower on the day at -0.03%.

Italy’s borrowing costs were lower, with 10-year yields last down 4 bps on the day at 1.8%.

“It’s a combination of the optimism on economies reopening, which we think will be short-lived, and expectations that there will be more monetary stimulus from major central banks,” said Peter Chatwell, head of multi-asset strategy at Mizuho.

In an interview published on the ECB’s website, ECB chief economist Philip Lane said the coronavirus-hit euro zone economy probably would not return to its pre-pandemic levels until next year at the earliest.

Analysts added that signs of strong demand for a new BTP Italia inflation-linked bond due in May 2025, targeting retail investors, also helped sentiment in Italy. The new bond is being sold from May 18 to May 21.

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