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

Tue Jul 29, 2014 11:38am EDT

Related Topics

* 60 bln euros of coupon, debt repayments due this week

* German 10-year yields also fall to record lows

* Portuguese yields underperform after Monday's sharp rally (Updates prices, adds BES scrapping shareholder meeting, quote)

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.

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 and 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.

PORTUGAL LAGS

Against the falling trend in yields across most of the market, Portuguese 10-year yields edged up 2 bps to 3.61 percent as shares in Banco Espirito Santo came under renewed selling pressure.

A newspaper report said BES, Portugal'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. The bank also cancelled a shareholder meeting that had been scheduled for July 31 after its largest shareholder was granted creditor protection.

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.

"You don't want to hear things like that as an investor ... There are still concerns over the state of the banking sector in Portugal," said Sergio Capaldi, fixed income strategist at Intesa SanPaolo in Milan.

The news braked Monday's sharp rally in Portuguese bonds after Moody's upgraded the country's credit rating. Some market participants, like the rating agency, believe the problems around BES should not have a big impact on the bond market.

"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." (Additional reporting by Marius Zaharia; Editing by Ruth Pitchford)

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