* Fitch upgrades Spain outlook to stable from negative
* ECB easing speculation supports euro zone bonds
* Some say ECB may be running out of monetary easing tools
By Marius Zaharia and Emelia Sithole-Matarise
LONDON, Nov 4 Spanish 10-year yields hit
six-month lows on Monday after Fitch upgraded its ratings
outlook, in a market underpinned by bets the European Central
Bank could signal further monetary easing this week.
Fitch revised on Friday Spain's credit ratings outlook to
stable from negative, citing progress in cutting the deficit and
a sooner-than-expected return to growth.
Profit-taking took hold as soon as Madrid announced plans to
sell 3-4 billion euros of 2018, 2023 and 2026 bonds on Thursday,
with investors making room in their books for the new paper.
Spanish 10-year yields ended the day flat at
4.02 percent, having fallen as low as 3.961 percent earlier.
"The Fitch release at the end of the week on Spain's outlook
was clearly welcomed by the market," said Matteo Regesta, a
strategist at Citi.
Core and lower-rated euro zone bonds rallied in the past
week after a sharp fall in inflation firmed up market bets the
ECB will ease policy further in coming months.
Surveys showing factory activity in the region accelerated
as expected in October did little to change investors' views on
the ECB, as shrinking manufacturing in France hampered a robust
In core markets, German Bund futures rose 4 ticks
to 141.89, having hit two-month highs at 142.32 last Thursday.
Cash 10-year Bund yields fell 1 bps to 1.68
percent and Dutch, French and Austrian yields also dipped.
While speculation of ECB easing policy on Thursday - either
through a rate cut or another injection of unlimited long-term
loans to banks - is rife, all but one of the 23 traders polled
by Reuters expect the ECB to remain on hold.
"What markets really have been saying over the past few days
is that they now think a greater probability should be assigned
to (a rate cut)," Investec chief economist Philip Shaw said.
The exact probability is hard to pin down due to distortions
on 2013 money market rates created by the excess liquidity in
the euro system injected mainly through three-year ECB crisis
loans to banks. Although falling, the excess cash remains ample.
But longer-rated rates seem to paint the picture of another
ECB easing move in the future. The one-year, one-year Eonia
forward rate, which shows where markets see
one-year Eonia rates in one-year's time, hit a three-month low
of 0.248 percent on Monday - a 10 bps fall from levels seen
before last week's inflation figures and less than half the
levels seen in early September.
That implies that in the next two years markets either
expect the ECB to prevent the excess liquidity from evaporating
or they price in a 25 basis point rate cut to 0.25 percent.
When excess liquidity in the market is insignificant, Eonia
rates tend to trade closer to the ECB's refinancing rate. The
overnight Eonia rate for December traded around 0.12 percent.
While a rate cut would have little impact on the economic
outlook, bond markets may react positively to it if they see it
as the last step before new unconventional measures.
"It would be a signal that you go after the disinflation
problem with gusto using your last (conventional) tool and this
could flatten the (euro zone yield) curves up to five years
quite nicely," said David Keeble, global head of fixed income
strategy at Credit Agricole in New York.