* ECB policymakers prepare ground for easing next week
* Weak lending, German jobless data adds pressure
* Peripheral and core euro zone bonds drop
* Low returns thwart Germany's 30-yr auction
(Adds fresh quote, Reuters poll results)
By Emelia Sithole-Matarise and John Geddie
LONDON, May 28 Spanish bond yields fell to
record lows on Wednesday as weak lending data and comments by
European Central Bank policymakers bolstered expectations the
bank will soon provide monetary stimulus, fueling demand for
Euro zone government bonds across the credit spectrum have
gained this week as fears receded that big wins by anti-euro
parties in EU parliamentary elections might derail fiscal
reforms in weaker countries. At the same time, expectations grew
that the ECB will ease policy next week.
ECB executive board member Yves Mersch ramped up the
rhetoric on Wednesday, saying the June 5 meeting could yield a
combination of policies to tackle low inflation and low credit
growth, but the timing of implementation could vary. That
followed similar hints by ECB President Mario Draghi and
colleague Ewald Nowotny earlier this week.
"All these ECB officials appear to be singing from the same
hymn sheet and are preparing the ground for action next week,"
said Nick Stamenkovic, a bond strategist at RIA capital markets.
Data showing falls in lending to households and firms in the
euro zone, a slump in money supply growth, and a surprising
uptick in German unemployment, further supported the case for
Measures being prepared by the ECB are likely to include
cutting the deposit rate into negative territory - effectively
charging banks to hold cash at the ECB overnight - and bank
loans aimed at helping to increase lending to smaller companies.
Thirty-one of 48 economists polled by Reuters this week said
such a combination would help boost lending in the euro zone.
Spanish 10-year yields fell 8 basis points to a
record low of 2.80 percent, according to Reuters data. Italian
equivalents were 7 bps lower at 2.91 percent, not
far from the record low of 2.89 percent they reached two weeks
Italian yields extended this week's declines after Prime
Minister Matteo Renzi's party scored a surprisingly big win in
EU parliamentary elections over the anti-establishment 5-Star
German 10-year yields, the benchmark for euro
zone borrowing, also dropped 5 bps to hit lows for the year of
1.29 percent, according to Tradeweb data, despite a
disappointing auction of 30-year bonds on Wednesday.
Ultra-low yields were blamed for poor investor demand at
Germany's auction, where the Bundesbank had to retain bonds to
allow the country its 2 billion euro target. It was the second
successive German auction to be technically uncovered, following
a 10-year sale last week, and the fifth this year.
"Given the very expensive levels reached by the Bund, what's
the point of going for the 30-year Bund when you can go for some
yield pick-up in (French) OATs or Spanish 30-year?" said
Jean-Francois Robin, a strategist at Natixis.
The 30-year Bund yielded 2.24 percent in the secondary
market, just over 50 bps more than similar-maturity French bonds
and 175 bps above Spanish 30-year yields.
The firmer market tone is, however, expected to augur well
for an Italian auction on Thursday of 6.0 billion to 7.5 billion
euros of five- and 10-year bonds, after a smooth sale on Tuesday
of 3 billion euros of zero-coupon debt and 1 billion euros of
"There might just be a little bit of concession going into
the auction tomorrow but it should go OK," a trader said.
"Bigger picture, we still remain constructive on the
periphery given the ECB outlook and think there will be further
compression in spreads."
(Editing by Larry King)