* Spanish CPI pushes peripheral bond yields to new lows
* Expectations of further ECB easing growing
* Italian 10-year auction yield lowest since Oct. 2005
(Updates with Italian auction results)
By Marius Zaharia
LONDON, March 28 Spanish, Italian, Portuguese
and Irish bond yields fell to new historical lows on Friday as
an unexpected drop in Spanish inflation bolstered expectations
the European Central Bank could ease monetary policy further.
Italy's cost of borrowing over 10 years fell to its lowest
since October 2005 at a Friday auction. It raised the top end of
its larger-than-usual 7.5-10 billion euros target.
With some market participants betting that eventually the
ECB may even begin to print money via asset purchases, yields on
top-rated debt are pinned at ultra-low levels, prompting
investors to look down the ratings scale to maximise returns.
The soft inflation data has increased speculation that the
ECB may at least give clearer hints on how much it is prepared
to loosen monetary strings at its monthly meeting next Thursday.
Data showed on Friday that Spanish consumer prices were down
0.2 percent year-on-year in March, compared with a previous
reading of 0.0 percent and a Reuters poll forecast of a 0.1
That led to expectations that inflation for the whole euro
zone, due on Monday, could fall even below the 0.6 percent
Reuters consensus. The ECB's target is just below 2.0 percent.
"Investors are pricing in a more dovish ECB given the low
inflation data ... they continue to crave for yield," DZ Bank
strategist Christian Lenk said.
Italian 10-year bond yields fell to their lowest
in 8-1/2 years at 3.261 percent, before rebounding to 3.30
percent as dealers sold some of the bonds they bought at the
auction back to the market.
There will be a further pointer on euro zone inflation from
German data due at 1300 GMT. A 1.0 percent rise is expected.
"ANY KIND OF ACTION"
Spanish 10-year yields also hit their lowest in
eight years at 3.2 percent, while Irish yields
dipped to a new record low of 2.974 percent, according to
"Investors are transfixed by inflation and monetary
developments in the euro zone," said Luca Jellinek, European
head of fixed income at Credit Agricole. "An increasing portion
of the market is betting that the increasing stream of hints and
comments on ... (asset purchases) by the ECB will result in some
Portuguese 10-year yields fell faster than most
of their euro zone peers to touch levels below 4 percent for the
first time in four years, as investors grew more confident it
will make a clean exit from its bailout programme in May.
Rabobank strategists recommended investors buy Portuguese
debt against German Bunds, targeting a 200-basis-point gap
between the 10-year yields of the two issuers, versus roughly
250 bps on Friday.
At the height of the crisis, the premium Portuguese bonds
offered over Bunds, the benchmark for euro zone borrowing costs,
was more than 1,500 bps.
"Approaching the exit of the bailout is sufficient to drive
Portuguese yields further down," DZ Bank's Lenk said.
(Editing by Catherine Evans)