Peripheral bond yields dip as ECB expected to reinforce support

Mon Sep 1, 2014 4:38am EDT

* Investors poised for Thursday's ECB meeting
    * Markets mindful of Ukraine escalation
    * ECB's Coeure says ECB ready to adjust policy
    * France's Valls call for more monetary easing

    By John Geddie
    LONDON, Sept 1 (Reuters) - Low-rated euro zone bond yields
dipped on Monday as investors positioned for the European
Central Bank to reinforce support for the bloc's faltering
economy on Thursday against a backdrop of rising tensions over
Ukraine.
    Policymakers and national leaders joined calls over the
weekend for ECB president Mario Draghi to announce further
monetary easing -- even though August's inflation print came in
line with expectations on Friday, which was seen as reducing the
chances of new policy measures this week.
    "Investors are positioning themselves for a dovish ECB
meeting," said Alessandro Giansanti, rates strategist at ING.
    "Peripheral markets will be the main beneficiary from any
other action from the ECB in terms of liquidity injections."
    Investors will be watching for any details of a broad-based
quantitative easing (QE) asset purchase programme, which Draghi
hinted at in a speech at Jackson Hole, Wyoming on Aug 22. Some
banks, including JP Morgan and Nomura, also expect an interest
rate cut.
    ECB sources told Reuters last week that new action on
Thursday was unlikely but not impossible, and that the barrier
to QE was still "very high". 
    Spanish and Italian 10-year bonds were 4 and 6 basis points
lower respectively at 2.20 and 2.39 percent on Monday.
  Greek and Portuguese equivalents
were 6 and 3 bps lower at 5.80 and 3.20 percent. 
 
    ECB executive board member Benoit Coeure said the Bank was
ready to adjust policy further if needed and boost bank
liquidity, in an essay published in Greek newspaper Ta Nea on
Saturday. 
    French Prime Minister Manuel Valls reiterated on Sunday
calls for the ECB to go "further" in tackling the problem of an
overvalued euro. Valls said the ECB's June decision to cut
interest rates was a "strong signal" but more was
needed. 
    Draghi's remarks at Jackson Hole have, however, appeared to
raise the ire of some politicians, pointing to divisions at the
heart of Europe's establishment. 
    German news magazine Der Spiegel reported on Sunday that
Chancellor Angela Merkel called Draghi to voice her discontent
over his comments that proposed a greater emphasis on fiscal
stimulus over austerity in order to boost growth in Europe.
    A German government spokesman denied Der Spiegel's account
of the call.
    "Europe is sinking ever deeper into the quagmire, be that on
the economic, military or political fronts. Yet the policy
responses show little evidence of the decisive leadership that
is needed," said Ciaran O'Hagan, strategist at Societe Generale.
    German 10-year bond yields were flat at 0.88 percent on 
Monday, just off record lows of 0.867 percent hit last week, as
the latest chapter of the conflict in Ukraine kept up demand for
safe haven assets. 
    Russian President Vladimir Putin called on Sunday for
immediate talks on the "statehood" of southern and eastern
Ukraine, although his spokesman said this did not mean Moscow
now endorsed rebel calls for independence for territory they
have seized. 

 (editing by John Stonestreet)
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