EURO GOVT-Demand for yield lifts Italian, Spanish debt
* Hunt for yield also benefits French paper vs Germany * Portugal's debt dips, recovers after court rejects some austerity * German yields need fresh impetus to fall below 1.20 pct By Ana Nicolaci da Costa LONDON, April 8 (Reuters) - Italian and Spanish debt rose on Monday as investors favored high-yielding bonds over German ones, while Portuguese paper recovered from early falls on a court rejection of some austerity measures. Non-German euro zone debt was mostly higher, extending Friday's moves, when the prospect of interest from investors in Japan after its central bank announced extraordinary stimulus measures lifted debt markets. "Investors, not only in Europe, but across the globe are struggling to find pick-up or to find high-yielding assets, so this is supporting not only Spain and Italy but also the likes of Belgium and France and the other semi-core countries," Michael Leister, senior interest rate strategist at Commerzbank, said. "What is noticeable is indeed this resilience towards the negative newsflow we had with regards to Portugal." Portuguese borrowing costs rose sharply in early trade and the cost of insuring its bonds against default jumped on concerns over the country's ability to keep its bailout programme on track after the constitutional court overturned 900 million euros of planned austerity measures. But traders said there was no real selling and Portuguese 10-year yields turned lower to stand down 1 basis point on the day at 6.42 percent. Ten-year Spanish yields fell 8 bps to 4.70 percent and the Italian equivalent eased 11 bps to 4.30 percent, extending Friday's rally which was boosted by an influx of cash from Asia following the Bank of Japan's plan. French and Belgian borrowing costs touched record lows, with higher-rated euro zone debt having particularly benefited from speculation Japanese investors would switch out of local government debt into euro zone bonds. French 10-year bond yields hit a record low at 1.71 percent and the Belgian equivalent at 1.928 percent. LOFTY LEVELS German Bund futures were 17 ticks lower at 146.17, having risen on Friday to their highest since June 2012 after U.S. jobs data came in much lower than expected. Gloomy economic fundamentals in the euro zone helped take 10-year German yields below 1.20 percent on Friday to their lowest levels since right before ECB President Mario Draghi promised in July to do whatever it took to protect the euro. But analysts said German bonds needed a fresh trigger to rally further and take the 10-year yield below 1.20 percent from 1.23 percent currently. For Cyril Regnat, fixed income strategist at Natixis, the German debt rally is overdone. He expected forward Euribor rates to fall because of excess liquidity and bets for a more accommodative ECB and short-dated German yields to stay put, widening the spread between the two. "We have this floor at zero percent due to the ECB's reluctance to cut the deposit rate. While we are expecting a fall in forward Euribors, we believe that short-dated German bonds have no more upside potential," Regnat said. "So we would be seller of two-year German bonds and we would receive swap simultaneously.".
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