Periphery bond yields slip as weak PMIs back case for ECB easing

Mon Sep 1, 2014 11:47am EDT

* Investors position themselves for Thursday's ECB meeting
    * Euro zone manufacturing growth slowest in over a year
    * Coeure says ECB is ready to adjust policy
    * Ukraine accuses Russia of aggression as rebels regain
ground

 (Updates prices, adds fresh analyst comments)
    By John Geddie
    LONDON, Sept 1 (Reuters) - Low-rated euro zone bond yields
mostly dipped on Monday as data showing tepid growth in
manufacturing fuelled speculation that the ECB would increase
support for the bloc's faltering economy at its meeting on
Thursday.
    Policymakers and national leaders joined calls over the
weekend for ECB president Mario Draghi to ease policy further,
although many think Draghi will favour words rather than action
this week as he waits for existing measures to take effect.
    Concerns about the economy rose after Monday's data showed
euro zone manufacturing had grown at its slowest pace in over a
year in August, as new orders dwindled and factories suffered
because of rising tensions with Russia over the crisis in
Ukraine. 
    "The data was soft, particularly in Germany. It's all
reinforcing the concerns about the euro zone economy in
general," said Orlando Green, a fixed income strategist at
Credit Agricole.
    "The market, in some cases, given what Draghi said in
Jackson Hole, is anticipating some further loosening of policy
(by the ECB)."       
    Italian and Portuguese 10-year bond yields were 3 basis
points lower at 2.41 and 3.20 percent
 respectively, while Greek equivalents were 8 bp
lower at 5.78 percent.
    Banks including JP Morgan, Nomura and RBS are urging the ECB
to cut interest rates this week, with some expecting Draghi to
lower the charges on the emergency loans (TLTROs) that will be
made available to banks for the first time this month.
    Others will be keeping a close ear out for more readiness to
launch a broad-based quantitative easing (QE) asset purchase
programme, which Draghi hinted at in a speech at Jackson Hole,
Wyoming, on Aug. 22. 
    "An aggressive verbal intervention, signalling a greater
willingness to embark into a QE program, is necessary to
validate Draghi's speech," Deutsche Bank said in its weekly bond
market strategy note.
    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". 
    But as the euro zone's outlook dims, many are betting that
the ECB will eventually be forced to use all the tools in its
armoury. Deutsche Bank estimates the market is currently pricing
in a 50 to 70 percent probability of an unlimited QE programme. 
    
    INTO THE QUAGMIRE
    ECB executive board member Benoit Coeure said the ECB was
ready to adjust policy further if needed and boost bank
liquidity, in an essay published in the Greek newspaper Ta Nea
on Saturday. 
    Meanwhile, French Prime Minister Manuel Valls on Sunday
reiterated calls for the ECB to go further in tackling the
problem of an overvalued euro. Valls said the ECB's decision in
June to cut interest rates was a "strong signal", but more was
needed. 
    However, Draghi's remarks at Jackson Hole have irritated
some politicians, notably in Germany, one of the greatest
sceptics on the value of printing money. 
    The German news magazine Der Spiegel reported on Sunday that
Chancellor Angela Merkel called Draghi to voice her discontent
over his comments proposing a greater emphasis on fiscal
stimulus over austerity in order to boost growth. A German
government spokesman rejected 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.
    Spanish bonds slightly underperformed their periphery peers
as the market prepared to absorb a 50-year bond sold via private
placement. 
    Yields on 10-year debt were 2 bp up at 2.26 percent
 while those on 30-year paper were 7 bp higher at
3.53 percent.
    Among top-rated bonds, German 10-year bond yields were flat
at 0.88 percent, 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.  
    Ukrainian President Petro Poroshenko accused Russia on
Monday of "direct and open aggression", which he said had
radically changed the battlefield balance as Kiev's forces
suffer major reverses in their war with pro-Moscow separatists.
 

 (Additional reporting by Emelia Sithole-Matarise; Editing by
Kevin Liffey)
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