Italy, Spain yields dip to new record lows as cash glut eyed

Tue Jul 29, 2014 8:36am EDT

Related Topics

* Up to 60 bln euros of coupon, debt repayments due in week

* German 10-year yields also fall to record lows

* Portuguese yields underperform after Monday's sharp rally (Updates prices, adds fresh analyst comments)

By Emelia Sithole-Matarise

LONDON, July 29 (Reuters) - Spanish and Italian bond yields hit the latest in a series of record lows on Tuesday on expectations 60 billion euros of coupon and debt repayments this week will be reinvested.

At the same time, yields on 10-year German bonds, the benchmark for euro zone borrowing costs, touched all-time lows with analysts saying some investors were likely betting on weak inflation data later this week bolstering the case for potential asset purchases from the European Central Bank.

With Italy the only euro zone country to sell debt this week, cash flow will be ample in the market, keeping euro zone yields subdued at or near historic lows.

"This is added liquidity which must be reinvested," said Patrick Jacq, an interest rate strategist at BNP Paribas.

"The environment favours carry trades," he said, referring to trades where banks use cheap central bank money to invest in peripheral euro zone bonds that still offer relatively higher yields than those in core debt, despite a two-year rally.

Spanish and Italian 10-year yields fell 3 basis points to 2.46 percent and 2.64 percent respectively while equivalent Irish yields were also down a similar amount at a record low of 2.17 percent.

Given the glut of coupon and debt repayments, Italy's auction of up to 7 billion euros of five- and 10-year fixed-rated bonds and five-year floating-rate notes linked to euro zone inflation due on Wednesday is expected to draw solid demand.

PORTUGAL LAGS

German 10-year yields slid to 1.12 percent, below a previous record plumbed at the height of the euro zone debt crisis in mid-2012. Investors' focus is on flash euro zone inflation due on Thursday forecast to remain subdued at 0.5 percent in July though some are expecting an even weaker figure.

"Maybe investors are putting bets on lower inflation figures in Europe but perhaps it's a bit too risky for that. If we have a very low figure I'm sure some investors will start expecting more easing from the ECB but it's too early," said Cyril Regnat, a fixed income strategist at Natixis.

Against the falling trend in yields across most of the market, Portuguese 10-year yields edged up 3 bps to 3.62 percent as shares in the country's Banco Espirito Santo came under renewed selling pressure.

A newspaper report said BES, the country's biggest bank, was likely to post a huge first half loss that could wipe out its capital buffer and force a new capital increase.

Portugal's central bank said late on Monday that if BES'S loss is larger than its existing cushion of 2.1 billion euros, a capital increase will be used to guarantee adequate solvency levels.

The news braked Monday's sharp rally in Portuguese bonds after Moody's upgraded the country's credit rating and dismissed concerns that troubles at BES could spread. Market participants said that much of the anxiety over the impact on government finances was overdone, cautioning that holiday-thin markets were also exaggerating price moves.

"The degree of hand wringing over the ESI/ESFG credit situation, in Portugal, seems excessive, if for no other reason than the sums involved are sub-critical for Portugal," Credit Agricole strategists said in a note.

"Summer has brought some periphery pressure in recent years but, on the whole, that dynamic has proved to be a buying opportunity." (Editing by Mark Heinrich/Ruth Pitchford)

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