* Euro zone bonds buoyant after ECB signals could ease
policy in June
* Spanish, Italian, Irish yields at new record lows
* Portuguese yields lower after S&P revises credit outlook
* Money market rates fall sharply
By Emelia Sithole-Matarise
LONDON, May 9 Lower-rated euro zone bond yields
fell to new lows on Friday after the European Central Bank
bolstered expectations it was poised to deliver fresh monetary
stimulus next month.
A Standard & Poor's upgrade of Portugal's credit outlook to
stable from negative added to the positive sentiment and gave a
further boost to Lisbon as it prepares to exit its internatinal
bailout this month. Moody's is expected to at least follow suit
after the market close.
The focus remained on the ECB after President Mario Draghi
gave his clearest signal yet on Thursday that policymakers might
act in June to stem slowing inflation. Money market rates have
tumbled, with the one-year, one-year Eonia rate - the most
traded contract in the forward market - dropping to its lowest
in a year on Friday as traders firmed up easing bets.
This gave fresh impetus to the rally in lower-rated bonds,
which has been relentless this year after the ECB raised the
prospect that it could embark on an asset purchase programme, or
quantitative easing, if inflation remained persistently low.
Yields on Italian, Spanish and Irish 10-year bonds hit
record lows on of 2.91 percent, 2.87 percent
and 2.68 percent respectively,
outperforming benchmark German Bunds which were held steady.
"The market is trading the ECB options, both of a rate cut
in June and maybe further ahead of quantitative easing. That's
why we are seeing the outperformance in non-core paper," said
Alessandro Tentori, global head of rates strategy at Citi.
"If the scenario is that rates are going to stay low for a
very long time and not just the next two years, and if you are
going to have QE, there's no reason to price any spread at all."
Tentori added that the ECB's strong easing signal could also
prompt some investors, especially in Asia, who were still wary
of the euro zone's lower-rated bonds, to buy into the market and
lock into the relatively higher returns they offer.
Portuguese 10-year yields fell 2 basis points to
3.45 percent, the lowest since early 2006, after S&P lifted the
country's credit outlook early on Friday, far from peaks above
17 percent hit at the height of the euro zone debt crisis.
The move was largely expected by analysts and marks a big
turnaround in sentiment for a country which was seen at risk of
defaulting on its debt just two years ago.
Some market participants are becoming cautious after the
rapid fall in yields.
"In the European periphery we remain invested in Portuguese
and Slovenian government bonds," said Scott Thiel, head of
European Global Bonds at Blackrock.
"However, given their significant spread compression to
German Bund yields in recent weeks and in light of excessive
market expectations for imminent quantitative easing in the euro
zone, we have reduced these positions."
(Editing by Catherine Evans)