(Corrects bank's name in paragraph 8 to Credit Agricole, not
By Marius Zaharia
LONDON, March 31 Lower-rated euro zone bond
yields held near multi-year lows on Monday, with an expected
drop in euro zone inflation keeping speculation rife that the
European Central Bank may loosen monetary policy further later
Economists in a Reuters poll predicted a drop in inflation
to 0.6 percent in March from 0.7 percent the previous week, but
below-forecast Spanish and German inflation data on Friday
raised expectations of an even smaller figure. The euro zone
inflation figure is due for release at 0900 GMT.
The ECB is not expected to cut interest rates at its meeting
on Thursday, a Reuters poll showed. But an
inverted money market curve points to some expectation that it
could eventually ease monetary policy.
Even if the ECB does not ease policy, it is likely that it
will keep rates at record lows for a long time to bring
inflation back towards its target of just below 2 percent.
That would keep yields on top-rated euro zone debt at
ultra-low levels, pushing investors towards lower-rated bonds as
they try to maximise returns.
Italian 10-year yields dipped 1.5 basis points
to 3.29 percent on the day, having hit an 8-1/2 year low of
3.261 percent on Friday. Spanish yields fell 1 bps
to 3.23 percent, just off an eight-year low of 3.20 percent.
Portuguese yields were flat at 4.05 percent,
having dipped below 4 percent for the first time in four years
on Friday. Irish yields were only 2 bps off their
record lows of 2.974 percent.
"The EGB (European government bonds) market is fairly
overbought but should be boosted further by a weak ...
(inflation) figure," said Luca Jellinek, European head of fixed
income at Credit Agricole.
Most of last week's rally in peripheral bonds was driven by
comments by ECB policymaker and Bundesbank chief Jens Weidmann
that negative interest rates were an option to temper euro
strength and buying loans and other assets from banks to support
the bloc was not out of the question.
But on Saturday, Weidmann said the euro zone was not in a
deflationary cycle and that the ECB should not overreact to a
slowdown in inflation which should prove temporary.
"Weidmann is playing down deflation so I would have thought
we'd open much lower (in prices). But it's also month-end," one
(Reporting by Marius Zaharia; Editing by Hugh Lawson)