* Slightly dovish ECB tone underpin demand for Bunds
* Italy, Spain yields rise on nagging political concerns
* Irish bonds propped up after Dublin bank debt deal
By Emelia Sithole-Matarise
LONDON, Feb 8 German Bunds continued to push
higher on Friday after comments from the European Central Bank
chief fuelled expectations the bank could be willing to cut
interest rates if the euro continues to strengthen.
Nagging concerns about political stability in Spain and Italy
were piling pressure on higher-yielding peripheral bonds to the
benefit of Bunds, overshadowing an Irish bank debt deal that
will cut Dublin's borrowing costs over the next decade.
The Bund future was last 23 ticks up on the day at
143.03 with German 10-year bond yields at 1.59 percent
, down 2 basis points on the day.
German yields, led by two-year paper extended this week's
falls after ECB President Mario Draghi said on Thursday that the
ECB would monitor the economic impact of a strengthening euro,
feeding expectations the surging currency could open the door to
an interest rate cut. He also played down a rise in money market
"Bunds had to go up after Draghi. He was pretty dovish. I
don't think you can rule out a rate cut in the first half of the
year and that should keep things underpinned," a trader said.
German two-year yields, which are the most
sensitive on the curve to shifts in interest rate expectations,
were 1.3 bps lower at 0.16 percent, around their lowest in two
weeks. Some analysts expect further falls in coming days.
Among the euro zone's lower-rated bonds, Irish debt held
steady, underpinned in the afterglow of Dublin's bank debt deal
with the ECB that will reduce its borrowing costs over the next
decade, putting it on course to exit its bailout programme.
The benchmark Irish 10-year yield was hovering
around its lowest level since before the start of the subprime
crisis in 2007, hit on Thursday on news Dublin had clinched a
bank debt deal that will cut its borrowing needs over the next
Analysts expected Irish debt to keep outperforming
higher-rated Italian and Spanish bonds, whose recent sharp rally
came to a halt this week on mounting concerns about political
risk in the two countries.
Spanish 10-year yields were last at 5.42
percent while equivalent Italian yields were about
1 basis point up at 4.58 percent.
"On the 10-year Spanish bonds, we could go significantly
above 5.50 percent and reach the 5.60 area and it can be quite
fast and on the BTP 4.70-75 area could be reached as well," BNP
Paribas strategist Patrick Jacq said.
"On a longer-term view we still expect market friendly
outcomes of the political issues and the setbacks offer some
opportunities to enter long positions."
In Spain, Prime Minister Mariano Rajoy was facing pressure
to resign over a political scandal, in which he denies
wrongdoing. In Italy, signs that former Prime Minister Silvio
Berlucsoni's poll ratings were improving before elections in two
weeks sparked concern his potential comeback to the centre of
the country's politics could derail its austerity programme.