* ECB expected to cut refi rate to record low 0.5 pct
* Rate cut could prompt profit-taking in Bunds - traders
* Italy, Spanish bond yields fall
* Slovenia bond sale in focus after ratings cut
By Emelia Sithole-Matarise
LONDON, May 2 French 10-year borrowing costs hit
a record low on Thursday as expectations of an interest rate cut
from the European Central Bank underpinned broad demand for euro
zone government bonds.
The ECB's rate decision will come after the Federal Reserve
said it would keep to its bond purchases, as anticipated,
strengthening the view that monetary policy of major central
banks will remain looser for longer than initially thought.
Euro zone bonds have rallied across the board in recent
weeks on increased bets of further monetary easing from the ECB,
which is widely expected to cut its main refinancing rate by 25
basis points to a record low of 0.5 percent on Thursday.
Lower-rated Italian and Spanish bonds, as well as slightly
better-regarded French and Belgian paper, have benefited
especially from investors hungry for higher returns than those
offered by safe-haven German Bunds which were back near record
Hours before the ECB decision, France sold a new benchmark
10-year bond at a record low interest rate of 1.81 percent at a
solid auction of up to 7.93 billion euros of paper.
In the secondary market, French 10-year yields
held around all-time lows of 1.70 percent hit on Tuesday.
"The auction went very well considering the rally heading
into this sale with borrowing costs at new record lows and the
periphery enjoying yet another positive session, in part
emboldened by expectations that the ECB will cut rates," said
Richard McGuire, a strategist at Rabobank.
"We think while that (rate cut) is unlikely to have much in
the way of direct impact on growth it does signal that the ECB
is willing to act in terms of shoring up growth within the
Italian 10-year yields were 6 basis points
down at 3.84 percent while equivalent Spanish yields were 5 bps
lower at 4.09 percent, both back at their lowest
levels since October 2010.
SLOVENIA IN FOCUS
Safe-haven German Bund yields were 1 tick up
at 1.21 percent, while the Bund future was 11 ticks
lower at 146.47 as some investors booked profits after a rally
this week lifted it near a record high of 146.89 reached in June
Traders said the Bund market already had largely priced in a
quarter percentage point cut by the ECB, so Bunds, which were
near their record highs, could fall even in the event of such a
"A 25 basis point cut is probably fully priced to a degree
so you may get a bit of profit-taking if they do cut rates," a
Traders were also paying more than usual attention to small
euro zone member Slovenia as it reopened books on an offering of
dollar-denominated bonds at a slightly higher yield after
Moody's downgraded its credit rating to "junk'.
The country gained a bit of respite from Moody's rival
Standard & Poor's which said on Wednesday it still viewed
Slovenia as an investment grade country and was "broadly
confident" the government would overhaul its finances.