Euro zone bond yields dip as ECB's Draghi reaffirms possibility of QE

LONDON, July 15 Tue Jul 15, 2014 4:24am EDT

LONDON, July 15 (Reuters) - Euro zone bond yields slipped on Tuesday after European Central Bank President Mario Draghi reaffirmed the bank's readiness to print money if necessary to support the region's economic recovery.

With concerns over the financial health of Portugal's biggest bank easing, the market was steadier, putting lower-rated euro zone bonds on a firmer footing after last week's sell-off.

Draghi said late on Monday that policymakers were prepared to use unconventional measures to address the risk of too prolonged a period of too low inflation. Quantitative easing, or money printing to buy assets, was part of the bank's mandate, he said. He also said a stronger euro exchange rate was a risk to the sustainability of the euro zone recovery.

The ECB's ultra-easy monetary policy and the prospect that it may eventually embark on an asset-buying programme to support the region's feeble economic growth has fueled a relentless hunt for yield in peripheral bond markets.

Italian and Spanish 10-year yields were each down 3 basis points at 2.86 percent and 2.75 percent respectively.

Greek yields were 3 bps lower at 6.24 percent while their Portuguese equivalents dipped 1 basis point to 3.82 percent after Banco Espirito Santo took steps at the weekend to reassure investors of its stability.

"With the ECB signalling that it will continue to maintain an easing bias with the possibility of QE in coming months, peripheral spreads probably have scope to come further in," said Nick Stamenkovic, a bond strategist at RIA Capital Markets.

"We prefer Italy and Spain to Portugal at this juncture ... Whilst the worries about BES seem to have dissipated clearly this idiosyncratic risk has raised concerns that there could be further problems coming in the future. Spain by contrast is much further forward in bank recapitalisation while Italy is making progress."

DOVISH YELLEN?

German 10-year yields, the benchmark for euro zone borrowing costs, were 1 basis point down at 1.19 percent ahead of Germany's ZEW sentiment index for July, which is seen falling for a seventh consecutive month.

U.S. Federal Reserve Chair Janet Yellen's testimony to the Senate will also be watched after the June Fed minutes suggested policymakers were in no rush to raise interest rates.

"The market is positioned for a dovish view from Yellen so the risk is she could be slightly more hawkish than anyone is anticipating. But overall, just like with Draghi, we still think Yellen will stick to a dovish line," said Mathias van der Jeugt, a strategist at KBC.