* Euro zone bonds buoyant after ECB signals could ease
policy in June
* Spanish, Italian, Irish yields at all-time lows
* Portuguese yields lower after S&P boosts credit outlook
* Money market rates fall sharply
(Updates prices, adds more comments, detail)
By Emelia Sithole-Matarise
LONDON, May 9 Italian and Spanish borrowing
costs fell to record lows on Friday in a broad-based rally in
lower-rated euro zone bonds after the European Central Bank
signalled it could 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 while counterpart Fitch shifted its
outlook to positive from negative last month.
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 and bolster a fragile
economic recovery in the currency bloc. Spain and Italy, which
two years ago were at the forefront of the euro zone debt
crisis, badly need the recovery to gain traction to curb high
Money market rates have tumbled, with the 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
That 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 -
quantitative easing - if inflation remained persistently low.
"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.
Yields on Italian, Spanish and Irish 10-year bonds hit
record lows of 2.90 percent, 2.87 percent
and 2.65 percent respectively,
outperforming benchmark German Bunds.
This is the latest in a series of all-time low yields this
week for the countries that were worst hit by a debt crisis
which only started to ebb after the ECB pledged in mid-2012 to
do whatever it took to save the euro.
Some in the market saw scope for more falls.
"There's been a rebuilding of positions in those markets
(Italy and Spain) from investors who had been underweight them a
long time but I don't think that process is entirely finished
yet," said Sandra Holdsworth, investment manager at Kames
"Right now there's very little risk premium being attached
to a recurrence of events of three years ago and I would concur
that that does seem like a very small likelihood at the moment,
but obviously we are alert to potential change."
Portuguese 10-year yields fell 2 basis points to
3.44 percent, the lowest since early 2006, after S&P lifted the
country's credit outlook early on Friday. The yields are a far
cry from peaks above 17 percent hit at the height of the debt
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 and John Stonestreet)