Talk of further ECB easing lifts euro zone bonds
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON Nov 26 (Reuters) - Euro zone government bonds rose on Tuesday with commentary from some European Central Bank policymakers bolstering investors' belief in further monetary easing from the central bank.
The market was also supported by mixed U.S. economic data which suggested that the Federal Reserve could continue its bond-buying programme into the new year.
ECB Governing Council member Erkki Liikanen said the bank still has room to move on rates, if needed, even though its interest rates are approaching zero.
The comments echoed those made by Christian Noyer and Ardo Hansson on Monday but flew in the face of warnings by Executive Board member Yves Mersch, a known hawk, that the bank had limited scope for action and excess liquidity policy should not become permanent.
Inflation numbers on Friday will be key in moulding expectations as the market prepares for the ECB's Dec. 5 monetary policy meeting.
"Overall the pressure, compared to other episodes, on the ECB to do something seems to be a bit higher and persistent and a lot of people are calling on the ECB to do something ... It's not clear what, but it provides some support for the core market," said Citi strategist Alessandro Tentori.
German Bund futures rose 38 ticks to settle at 141.70, pushing ten-year German yields 4 basis points lower to 1.69 percent. Yields on other highly-rated euro bonds were down between 2-3 basis points.
A surprise fall in annual inflation for October to 0.7 percent, well below its target of just under 2 percent, prompted the ECB to cut rates this month. Inflation data for November is due on Friday and forecast at 0.8 percent, according to a Reuters poll.
"The euro zone economy is weak, inflation is subdued, the ECB is likely to continue to be accommodative to try to push monetary conditions a little bit easier," said David Scott, head of multi-sectoral strategy at Stone Harbour Investments, which manages $64 billion and is overweight on German bonds.
"Part of that process may well involve a move to, as we've seen in other countries, a move to more experimental policies, designed to push yields a little bit lower."
Ten-year Italian yields also fell 3.1 basis points to 4.07 percent on solid demand at a bond sale while Spanish equivalents were slightly lower at 4.17 percent.
Italy's two-year yields fell to a seven-month low of 1.16 percent at an auction of zero-coupon debt, as reduced funding needs and the euro zone's ultra-easy monetary policy fed demand for its short-term debt.
"The ECB is providing a backstop, the short end remains pretty well underpinned," Nick Stamenkovic, bond strategist at RIA Capital Markets, said before the auction.
"The underlying backdrop for peripherals is favourable but ahead of the supply on Thursday, investors might demand a bit of a concession." Italy will offer up to 2.5 billion euros of bonds maturing in 2024 on Thursday.
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