EURO GOVT-French, Belgian yields hit new lows on hunt for returns
* French, Belgium debt seen benefiting most from yield hunt * Italy, Spain debt rallies in wake of Japan stimulus plan * Portugal debt underperforms after court austerity ruling By Emelia Sithole-Matarise and Ana Nicolaci da Costa LONDON, April 8 (Reuters) - French and Belgian borrowing costs hit record lows on Monday, extending last week's falls as investors sought bonds with higher yields than Germany in the wake of Japan's unprecedented stimulus plans. Portuguese bonds underperformed most euro zone debt after a court rejected some planned austerity measures but the moves were modest - an early rise in yields turned around as the government scrambled to find new spending cuts. Prices of most other euro zone debt - with the exception of low-risk German benchmarks - rose, extending Friday's gains after the Bank of Japan unveiled a plan to buy $1.4 trillion in assets and drove Japanese yields to record lows. This stoked bets Asian investors would seek higher returns elsewhere. "There is a strong appetite for yields...Money has to be allocated to other currencies. There are limits to how much these investors can place in dollar bonds and (U.S.) Treasuries so they have to go into European bonds," said Riccardo Barbieri, a strategist at Mizuho in London. French and Belgian 10-year borrowing costs touched record lows at 1.71 and 1.97 percent respectively. Such higher-rated debt has particularly benefited from speculation Japanese investors will switch out of local bonds into the euro zone. The French 10-year yield premium over German Bunds is at its lowest since October 2012 at around 50 basis points, with Barbieri expecting it to fall a further 10 bps in coming days. "Investors are having to pick a place to try to earn a spread against Germany and they are still relatively comfortable with France because if something goes wrong in Europe it will have to be in the periphery," he said. Italian 10-year yields fell 7 bps on the day to 4.34 percent while 10-year Spanish yields were 3 bps lower at 4.75, also extending Friday's rally. Michael Leister, senior interest rate strategist at Commerzbank, said investors across the globe were seeking higher-yielding assets. "This is supporting not only Spain and Italy but also the likes of Belgium and France and the other semi-core countries," he 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 last stand 1 basis point up on the day at 6.44 percent. LOFTY LEVELS The resilience in peripheral bonds led investors to pocket profits in German Bunds on a rally last week following a weak U.S. labour market report and European Central Bank signals on Thursday that interest rates could be cut in the coming months. Bund futures fell 26 ticks on the day to settle at 146.08, having risen on Friday to their highest since June 2012. Gloomy economic fundamentals in the euro zone also helped take 10-year German yields below 1.20 percent on Friday to their lowest levels since just before ECB President Mario Draghi promised in July to do whatever it took to protect the euro. The 10-year yield was last up 2 bps at 1.24 percent with some analysts seeing no impetus for a sell-off in core bond markets given the downbeat economic outlook, political impasse in Italy and uncertainty over Portugal's austerity programme. "In the near term, the data releases and economic surveys for April are unlikely to bring any significant positive surprises...The Bund (yield) could go lower than 1.20 (percent). It traded briefly below 1.15 percent in July (2012). It's only a question of time before it goes back there," Barbieri said.