* Markets welcome Portuguese plans for "clean" bailout exit
* Portuguese bond yields at 8-year lows
* Some expect ECB to stop sterilising bond purchases
By Marius Zaharia
LONDON, May 6 Yields on the euro zone's lower
rated bonds hit multi-year lows on Tuesday as investors welcomed
Portugal's plans for a "clean" exit from its bailout and
continued to expect some future easing of ECB monetary policy.
Following in the footsteps of Ireland, Portugal said it
would end its international bailout this month without a back-up
loan. Barely two years ago, Lisbon had been seen
as at risk of defaulting on its debts.
Rather than worrying about the lack of a future safety net,
market participants saw Portugal's move as further confirmation
of an easing of the wider euro zone debt crisis.
Portuguese 10-year yields were last 3 basis
points lower on the day at 3.61 percent, having hit a new
eight-year low of 3.597 percent earlier, according to Reuters
"It's a normal step," said KBC strategist Piet Lammens of
Lisbon's move. "Sentiment in the market is very strong so it
will not unsettle the market."
Other yields in the euro zone's weaker states were also 1-3
basis points lower. In Spain, 10-year yields matched
their record lows at 2.97 percent, with Italian yields
also matching their lows at 3.029 percent.
The trend of falling yields remains supported by
expectations that the European Central Bank may ease monetary
policy further as inflation remains below expectations and more
than one percentage point below target.
No rate cut is seen at the ECB's meeting on Thursday and any
move to print money by buying assets is likely to be some way
off. However, recent stress in money markets has rekindled some
expectations of another liquidity injection.
This could come in the form of suspending the weekly ECB
deposit tenders aimed at draining from the market an amount
equal to the outstanding volume of government bonds purchased by
the central bank via its Security Market Programme (SMP) at the
height of the crisis.
The so-called "sterilisation" operations were introduced to
quell any concerns that the SMP was directly financing state
budgets, something the ECB is not allowed to do. Suspending them
would release 167.5 billion euros in the market.
Speculation that the ECB might consider such a move picked
up at the end of last month when a spike in overnight
bank-to-bank Eonia lending rates above the 0.25 percent
refinancing rate led to the ECB failing to drain the full
The failure, coupled with an increased take-up from banks at
the ECB's weekly offerings of unlimited loans, was the
equivalent of a liquidity injection, which eased tensions in the
money market and Eonia has fallen back to 0.126 percent.
But cheap overnight money may again lead to a small take-up
of loans from banks and full sterilisation of the SMP programme
at the ECB's regular liquidity operations later on Tuesday,
eventually leading again to higher money market rates.
Many analysts say this type of volatility in money markets
may create discomfort within the ECB, which wants interbank
rates to remain low and stable to support the still-fragile
economic recovery in the euro zone.
"The large unpredictable swing factor from the SMP operation
should ... lead to second thoughts at the ECB about the
usefulness of this operation," Commerzbank rate strategist
Christoph Rieger said.
(Editing by Gareth Jones)