* Draghi says ECB is ready to offer more long-term loans
* Comments seen as dovish, boost euro zone debt
* Irish debt premium hits lowest since May 2010
By Ana Nicolaci da Costa and Marius Zaharia
LONDON, Sept 23 Euro zone debt yields fell on
Monday after European Central Bank President Mario Draghi
flagged the possibility of another round of cheap loans to banks
keep monetary policy loose.
Draghi told the European Parliament's Economic and Monetary
Affairs Committee the ECB was ready to use any instrument,
including another long-term refinancing operation if needed, to
keep short-term money market rates at a level warranted by its
assessment of medium-term inflation.
The ECB has already injected more than a trillion euros
through two such operations, in December 2011 and February last
year, to support bank lending and avert a credit crunch.
Analysts had expected the U.S. Federal Reserve's decision to
leave its bond-buying programme untouched last week to have
eased the pressure on the ECB for more monetary stimulus.
"We have had comments from Mr. Draghi hinting there could be
further support for the banks," Nick Stamenkovic, bond
strategist at RIA Capital Markets said.
"To mention the LTRO per se clearly shows they could be
concerned about the pay-down of LTROs by quite a few banks and
the damage that's doing to liquidity...It also clearly shows
that the ECB is still very cautious about the economic outlook
The excess liquidity held by euro zone banks
last stood at 221 billion euros. At 200 billion,
market rates have historically started to rise.
Ten-year German yields fell 3.6 basis points
to 1.87 percent and Bund futures pushed higher. Dovish
comments from Federal Reserve officials were also supportive,
Riskier euro zone bonds also rose, with 10-year Italian
yields falling 2.3 bps to 4.27 percent and the
Spanish equivalent falling 3 bps to 4.28 percent.
Money market traders expect the ECB to inject more liquidity
into markets through another three-year LTRO within the next 12
months, a Reuters poll showed on Monday.
Ireland's debt premium fell to its lowest in almost 3-1/2
years after Moody's moved a step closer to restoring the
country's investment grade ratings months before its exit from
its 85 billion euro bailout programme.
Moody's is the only one of the three big agencies to class
Ireland as "junk", but its move to lift the rating outlook to
stable from negative came against a trend of mostly negative
rating actions against euro zone sovereigns in recent years.
Losing junk status may further improve sentiment towards
Ireland but market reaction may be limited as the move was
expected to trigger little buying by index-tracking bond funds.
Ireland's rating excludes it from just one major index,
JPMorgan's EMU Government Bond Investment Grade Index, which is
only tracked by 3-5 billion euros of bond funds. Irish bonds
would have only a 1.6 percent weight if they were included.
"The element of surprise is (also) lacking. Ireland is
already perceived as the strongest of the peripheral countries
so it's understandable the market is not going crazy about (its
ratings), DZ Bank rate strategist Christian Lenk said.
The 10-year yield gap between Irish bonds and
their German equivalent narrowed to 193 bps and down from
euro-era highs of over 1,200 bps. The spread, however, was
slightly wider on the day by late trade at 202 bps as Bunds
Euro zone debt showed a muted reaction to Chancellor Angela
Merkel's winning a third term in Sunday's German elections, with
investors keen to see the shape of the new government before
assessing how it will affect European policy.