EURO GOVT-French yields at record low as ECB rate cut eyed

Thu May 2, 2013 6:15am EDT

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By Emelia Sithole-Matarise

LONDON, May 2 (Reuters) - French 10-year borrowing costs hit a record low on Thursday as expectations of an interest rate cut from the European Central Bank underpinned broad demand for euro zone government bonds.

The ECB's rate decision will come after the Federal Reserve said it would keep to its bond purchases, as anticipated, strengthening the view that monetary policy of major central banks will remain looser for longer than initially thought.

Euro zone bonds have rallied across the board in recent weeks on increased bets of further monetary easing from the ECB, which is widely expected to cut its main refinancing rate by 25 basis points to a record low of 0.5 percent on Thursday.

Lower-rated Italian and Spanish bonds, as well as slightly better-regarded French and Belgian paper, have benefited especially from investors hungry for higher returns than those offered by safe-haven German Bunds which were back near record lows.

Hours before the ECB decision, France sold a new benchmark 10-year bond at a record low interest rate of 1.81 percent at a solid auction of up to 7.93 billion euros of paper.

In the secondary market, French 10-year yields held around all-time lows of 1.70 percent hit on Tuesday.

"The auction went very well considering the rally heading into this sale with borrowing costs at new record lows and the periphery enjoying yet another positive session, in part emboldened by expectations that the ECB will cut rates," said Richard McGuire, a strategist at Rabobank.

"We think while that (rate cut) is unlikely to have much in the way of direct impact on growth it does signal that the ECB is willing to act in terms of shoring up growth within the region."

Italian 10-year yields were 6 basis points down at 3.84 percent while equivalent Spanish yields were 5 bps lower at 4.09 percent, both back at their lowest levels since October 2010.

SLOVENIA IN FOCUS

Safe-haven German Bund yields were 1 tick up at 1.21 percent, while the Bund future was 11 ticks lower at 146.47 as some investors booked profits after a rally this week lifted it near a record high of 146.89 reached in June 2012.

Traders said the Bund market already had largely priced in a quarter percentage point cut by the ECB, so Bunds, which were near their record highs, could fall even in the event of such a measure.

"A 25 basis point cut is probably fully priced to a degree so you may get a bit of profit-taking if they do cut rates," a trader said.

Traders were also paying more than usual attention to small euro zone member Slovenia as it reopened books on an offering of dollar-denominated bonds at a slightly higher yield after Moody's downgraded its credit rating to "junk'.

The country gained a bit of respite from Moody's rival Standard & Poor's which said on Wednesday it still viewed Slovenia as an investment grade country and was "broadly confident" the government would overhaul its finances.

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