* Italian, Spanish bond yields fall as ECB intervenes in the
* Contagion fears, money market stress ups need for bold
* Bunds hit session low on renewed talk of ECB lending to
By Ana Nicolaci da Costa
LONDON, Nov 18 German Bund futures fell on
Friday on speculation the European Central Bank could lend money
to the IMF to bail out bigger euro zone economies, although ECB
officials and Germany continued to resist pressure for the bank
to play a bigger anti-crisis role.
The speculation coincided with a sharper move lower in
Italian and Spanish yields after they came off the day's highs
as the ECB intervened in the secondary market.
News agency Dow Jones reported that talks on ECB lending to
the International Monetary Fund may start soon and that Germany
and the ECB were still opposed to the idea but may be willing to
consider it, citing sources.
"Within the article, it did say the ECB are actually opposed
to the idea and Germany, so it doesn't really make sense why we
are selling off on it, but the fact of the matter is we are.
People look at headlines," one trader said.
The German Bund future was down 56 ticks on the day
at 136.76, but analysts say there will continue to be demand for
safe-haven debt as long as euro zone policymakers do not come up
with a big-bang solution to the debt crisis.
AUSTERITY IS INSUFFICIENT
Italian Prime Minister Mario Monti comfortably won a vote of
confidence in his new government on Thursday after promising
rigour and fairness in painful reforms to dig the country out of
a financial crisis that threatens the entire euro zone.
But many in markets say austerity measures alone will not be
enough to contain the debt crisis, putting pressure on the ECB
to tide the region over with bond purchases until policymakers
can agree on more effective action .
Italian 10-year government bond yields
fell 19 basis points to 6.7 percent having earlier
stood close to unsustainable levels at 6.98 percent. One trader
cited ECB buying in the five- to 10-year part of the curve.
Spanish 10-year yields were 8.4 basis points
lower on the day at 6.43 percent, having earlier hit a high for
the day at 6.55 percent.
The gap between Italian and Spanish yields has narrowed in
recent sessions -- a development one analyst said showed the
crisis was escalating.
The yields are likely to converge further with Spanish
yields set to jump as the January 2022 bond sold on Thursday
becomes the new benchmark at that maturity.
"It's symptomatic of the fact that one individual country
can't influence this now, it's a systemic issue," Lyn
Graham-Taylor, rate strategist at Rabobank, said.
"We all know that Spain has better fundamentals than Italy
but now the market is just viewing them as ... the same risk."
The ECB is reluctant to take on a bigger role for fear of
undermining its independence from politics and its price
stability mandate when euro zone inflation is at 3 percent --
above its target of just below 2 percent.
A German newspaper reported the ECB had secretly imposed a
weekly limit of about 20 billion euros ($27 billion) on its euro
zone sovereign bond-buying programme.
ECB chief Mario Draghi told euro zone governments on Friday
to act fast to get their EFSF rescue fund up and running,
showing exasperation at their slow progress.
Other senior ECB policymakers joined Draghi in pushing the
governments to act, saying the central bank should be asked to
go beyond its inflation-busting mandate.
Bond strategists in a Reuters poll saw an even chance of a
bigger role for the ECB. The 50 analysts surveyed gave a median
48 percent probability the ECB will be forced to adopt a policy
of quantitative easing while a slim majority bet it could become
a lender of last resort.