* Draghi boosts speculation of further ECB easing
* Most euro zone bond yields fall to record lows
* Greece plans to sell three-, five-year bonds in next two
(Updates prices, adds new comment)
By Marius Zaharia
LONDON, Aug 25 Yields on most euro zone
government bonds fell to record lows on Monday as speculation
grew that the European Central Bank was preparing a programme of
asset purchases to counter wilting inflation.
Germany, France, Italy, Spain, Portugal, Ireland and others
saw their yields drop to all-time lows. Greek yields also fell
but remained above this year's troughs; a senior source told
Reuters that Athens planned to sell debt soon.
In stronger language than he has used in the past, European
Central Bank President Mario Draghi said on Friday at an annual
meeting of central bankers in Jackson Hole, Wyoming, that the
ECB was prepared to respond with all its "available" tools
should inflation drop further.
He said governments could do more to boost demand and
pointed out how inflation expectations had dropped over the past
month. That increased speculation the ECB will embark on a
large-scale asset-buying scheme known as quantitative easing, or
QE, to revive inflation.
"The market seems to be attaching a higher probability that
the ECB will do QE, and rightly so," said Jussi Hiljanen, chief
fixed income strategist at SEB. "Inflation expectations have
been dropping like a stone and this is causing increasing
concern for the ECB."
German 10-year yields hit a record low of
0.926 percent, before puling back to 0.95 percent. The moves may
have been exacerbated by thin volumes on a bank holiday in
London and might partly reverse on Tuesday, analysts said.
Euro zone consumer prices grew only 0.4 percent in July and
are expected to post 0.3 percent growth in August on Friday, a
far cry from the ECB's target of just below 2 percent.
The five-year, five-year forward breakeven rate
- the ECB's preferred measure of the inflation
outlook, which measures roughly where investors see five-year
inflation rates in five years, dropped almost 20 basis points in
August alone, to last trade at 1.96 percent. Traders say it is
close to its 2010 record lows of around 1.90 percent.
Other measures of inflation expectations have also fallen.
Ten-year inflation swaps trade at 1.44 percent, while two-year
breakeven rates are negative.
French yields fell as low as 1.29 percent,
with the market shrugging off news that the government resigned.
President Francois Hollande's office said a new government would
be formed on Tuesday.
"There are no real implications from that on the market
because the market is in QE mood," said Alessandro Giansanti,
senior rate strategist at ING. "The ECB doesn't have any other
Adding to the lacklustre euro zone picture, Germany's Ifo
business sentiment index dropped for a fourth straight month in
August, amid concern about the Ukraine crisis and the impact of
the sanctions and counter-sanctions Russia and the West have
imposed on each other.
Despite the deteriorating economic outlook, investors
grabbed even the higher-risk bonds in the currency union. The
higher probability of QE means that they can hope to sell the
bonds to the ECB for a profit.
Spanish and Italian 10-year
yields fell more than 10 bps to 2.22 percent and 2.44 percent,
respectively. Portuguese yields fell 25 bps to
Taking advantage of the renewed demand, Greece aims to
re-open its recent three- and five-year bond issues in the next
two weeks to raise as much as 1.5 billion euros. But it will
take T-bills as payment instead of cash.
"The market is clearly buying the ... idea of QE," said
Jean-Francois Robin, global head of strategy at Natixis.
(Reporting by Marius Zaharia, editing by Nigel Stephenson and
Hugh Lawson, Larry King)