ECB bets push Spanish, Italian, Portuguese yields to multi-year lows

Thu Mar 27, 2014 1:12pm EDT

* Peripheral yields hit new multi-year lows on ECB
speculation
    * Five-year bonds outperform their two- and 10-year peers
    * Money markets also point to ECB easing expectations

 (Updates prices, adds fresh comments)
    By Marius Zaharia and Emelia Sithole-Matarise
    LONDON, March 27 (Reuters) - Spanish, Italian and Portuguese
bond yields hit multi-year lows on Thursday, with speculation
about further European Central Bank monetary policy easing
prompting investors to seek the bigger returns offered by
lower-rated assets.
    As the Federal Reserve in the United States signals an
eventual turnaround in its ultra-loose monetary policy, ECB
policymakers have left the door open to extraordinary measures
if deflation risks in the euro zone pick up.
    The ECB's policy bias has been a major driver in this year's
rally in peripheral bonds, which have outpaced German Bunds and
U.S. Treasuries, the world's main benchmarks for borrowing
costs. Yields have fallen to pre-crisis levels even in Greece,
where the euro zone sovereign debt crisis erupted in 2010 and
culminated in Athens defaulting on its debt two years ago.
    The latest trigger for speculation on what the ECB might do
next came unexpectedly from Germany, whose policymakers have
repeatedly voiced concerns about unorthodox monetary easing.
    ECB Governing Council member and Bundesbank chief Jens
Weidmann said earlier this week negative interest rates were an
option to temper euro strength and buying loans and other assets
from banks to support the bloc was not out of the question.
    "The more dovishly perceived ECB talk over the last couple
of days has supported the push to lower yields across the EGB
(euro zone government bond) space," said Norbert, European rates
strategist at Nomura.
    While the euro has already stopped falling and stock markets
have stabilised, bond traders said the ECB's comments simply
gave investors another reason to keep buying peripheral debt,
already in high demand since the start of the year.
    Any further ECB easing would at least anchor yields on
top-rated debt at ultra-low levels so that investors chasing
higher returns would be forced to look down the ratings scale.
The central bank meets next Thursday.
    Spanish 10-year yields fell 4 basis points to a
new eight-year low of 3.25 percent while Italian yields
 were down by a similar amount to a new 8-1/2 year
low of 3.289 percent. Portuguese yields slid to a
new four-year low of 4.048 percent, according to Reuters data.
    Despite the falls, the bonds still offered a premium over
Bunds, which yielded 1.54 percent, 3 bps less than
the Wednesday close. Greek bonds, the region's highest yielders,
offered 6.92 percent.
    "Investors are still hunting for yield and on top of that we
see improving economic growth (in the periphery), reduced
political risk in Italy, expectations of Portugal moving out of
its bailout," said ING rate strategist Alessandro Giansanti. 
    Data on Thursday showing private sector loans in the euro
zone contracted further in February boosted ECB speculation even
more. ECB figures also showed euro zone banks mainly increased
their holdings of sovereign debt in February after they passed
the year-end deadline for balance sheet data under the central
bank's asset review.  
    Some in the market said banks seeking to offset the impact
of rising loans on their budgets were also driving buying of
peripheral euro zone bonds.
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 Euro zone money supply link.reuters.com/zak35s
 Euro zone inflation link.reuters.com/vex45v
 ECB rates link.reuters.com/vex45v
 Peripheral bond yields link.reuters.com/vex45v
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 
    GAUGING EXPECTATIONS
    Evidence that the latest leg in the bond market rally was
driven by ECB expectations could be found in the flattening of
two/five-year yield curves and the steepening of the
five/10-year yield curves, analysts said.
    Five-year bonds outperform their peers when expectations of 
looser monetary policy grow as investors search for higher
yields in longer-dated maturities and expect the tightening
cycle to start later. While yields fall across the curve,
10-year yields fall less because of their term premium.
    Five-year bond yields fell more than their two- and 10-year
peers across the euro zone on Thursday. In Italy and Portugal 
five-year bond yields fell 4-8 basis points.
    Money markets also showed that investors were positioning
for further policy easing. Forward overnight Eonia bank-to-bank
borrowing rates, one of the best gauges of that, traded 3-6 bps
below the 0.172 percent spot Eonia rate. 
    There was some scepticism though that ECB action was
imminent despite the market expectations.
    "When ECB speakers talk about potential further measures the
'if needed' is the important bit in any comments about further
easing which has to be seen against the backdrop of the ECB's
easing bias," Aul said. 
    "This is therefore basically a reiteration of the ECB's
forward guidance and doesn't imply immediate action from the
ECB."

 (Editing by Hugh Lawson)
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.