* Euro zone CPI picks up in Feb, stays far below target
* German yields, money market rates push higher
* Spanish, Italian, Greek yields stay near multi-year lows
* Expectations of further ECB easing remain
By Marius Zaharia
LONDON, Feb 28 Spanish bond yields reached new
historical lows on Friday as persistent expectations the
European Central Bank will loosen monetary policy further
supported lower-rated debt even though inflation ticked up.
A slight rise in euro zone inflation in February,
confounding forecasts of a fall, pushed German 10-year Bund
yields, the benchmark for euro zone borrowing costs, higher.
Money market rates also edged up, suggesting ECB easing
expectations cooled somewhat. However, they remained at subdued
levels that still implied markets believed that, with price
rises still way below the central bank's target, it might
eventually move to ensure the euro zone avoids deflation.
"There's been a bit of an adjustment - the market was
expecting a bit lower figures, particularly after the German
numbers yesterday," ICAP strategist Philip Tyson said.
"(The pick up in inflation) may be sufficient to allow the
ECB to keep playing for time next week. But ... the pressure on
the ECB to ease won't go away."
If the ECB relaxes monetary policy further, yields on
top-rated German Bunds will remain at ultra-low levels,
prompting investors to take on more risk and put some of their
money into lower-ranked bonds in search of higher returns.
Spanish 10-year yields hit eight-year lows of
3.48 percent before the inflation data and retreated only to
3.50 percent afterwards. Five-year yields stood at
2.01 percent after briefly falling below 2 percent for the first
time in at least 20 years, according to Reuters data.
Greek 10-year yields fell below 7 percent for
the first time since April 2010, hitting levels seen before
Europe and the International Monetary Fund bailed out Athens.
They last stood at 6.88 percent, having fallen as low as
6.78 percent earlier.
"It's less clear cut that the ECB will do something next
week ... so there was a small corrective move," said
Jean-Francois Robin, global head of strategy at Natixis in
"But if you look at Greek yields below 7 percent ... and at
other peripheral yields, it's clear that the carry trade is
continuing in Europe."
Money market rates edged higher, but expectations of more
ECB easing have not been wiped out completely.
The Eonia rate dated for the March 6 meeting stood at 0.15
percent, rising almost 2 bps after inflation figures. It was
slightly lower than the 0.162 percent spot rate. Longer-dated
Eonia rates were lower, trading at roughly 11 bps on maturities
from June to November, reflecting expectations the ECB may still
act later in the year.
"I don't think today's inflation will be decisive in any way
or another. I still think a lot of people expect something from
the ECB," said Anders Svendsen, chief analyst at Nordea.
February's blip only took inflation to 0.8 percent, still
well below the ECB's target of just below 2 percent and within
the "danger zone" of below 1 percent drawn by the bank's
president Mario Draghi.
A third of the economists polled by Reuters before the
inflation figures saw a cut in interest rates at Thursday's
meeting, while a growing minority expect the ECB to eventually
purchase government bonds and print money.
"It's still 0.8 percent only, so it doesn't mean the ECB
won't do something down the road," said Robin at Natixis.