* Markets welcome Portuguese plans for "clean" bailout exit
* Portuguese bond yields at 8-year lows
* Italian 10-year yields fall below 3 pct
* Some expect ECB to stop sterilising bond purchases
(Adds Fitch, fresh analyst comments, updates prices)
By Marius Zaharia
LONDON, May 6 Yields on some of the euro zone's
lower-rated bonds hit record lows on Tuesday as investors
welcomed Portugal's plans for a "clean" exit from its bailout
and kept faith in 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, investors saw Lisbon
as at risk of defaulting on its debts.
Now, far from worrying about the lack of a future safety
net, market participants see Portugal's move as confirmation the
euro zone debt crisis is subsiding.
Portuguese 10-year yields were last 4 basis
points lower on the day at 3.60 percent. They had hit an
eight-year low of 3.568 percent earlier, according to Reuters
data - compared with more than 17 percent at the height of the
crisis in 2011-2012. Few would have predicted then that a
country whose debt stands at 1.3 times its economic output and
unemployment at around 15 percent could regain investor
confidence so swiftly.
"Despite these challenges ... we believe Portugal's bailout
exit represents an important symbolic transition from the worst
of the crisis," said Dennis Shen, economic associate at
Yields in the euro zone's other weaker states were also 2-3
basis points lower. Ten-year yields in Spain, Italy and Ireland
reached record lows at 2.93 percent, 2.988 percent
and 2.739 percent, respectively.
Reflecting this turnaround in sentiment for countries which
two years ago were at the forefront of the euro zone debt
crisis, rating agency Fitch said on Tuesday there was potential
for credit rating upgrades for these countries in a scenario of
ecnoomic recovery and declining debt ratios.
Ireland, Portugal and Spain had the greatest medium-term
potential, in a favourable scenario, for multi-notch rating
recoveries because their creditworthiness fell further during
the crisis, it said in a statement.
The trend of falling yields was supported by expectations
the European Central Bank may ease monetary policy further, as
inflation remains below expectations and more than a 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.
That could come from suspending weekly ECB deposit tenders.
Those are aimed at draining from the market an amount equal to
the outstanding volume of government bonds the central bank
bought through its Security Market Programme (SMP) at the height
of the crisis.
These "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 sterilisation
would release 167.5 billion euros into the market.
Speculation that the ECB might consider such a move picked
up at the end of last month when overnight bank-to-bank Eonia
lending rates spiked above the 0.25 percent refinancing rate.
Consequently, the ECB failed to drain the full intended amount.
Last month's 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. Eonia rates have fallen back to 0.126 percent.
"For now it's still at a level where it's going to force the
ECB's hand. If you combine that with the fact that downside
risks to inflation are still there but have eased slightly, we
expect more promises of potential action from the ECB on
Thursday," said ICAP strategist Philip Tyson.
He and others in the market say given the tick up in euro
zone inflation last month, policymakers were likely to wait
until the May figure and for their own growth and inflation
forecasts in June before acting.
(Additional reporting by Emelia Sithole-Matarise, Editing by
Larry King/Ruth Pitchford)