* German Ifo falls more than expected in June
* Lower-rated bonds rally amid yield hunt
* Banks borrow more than expected in 1-week loans
* Money markets to be contained by new liquidity
(Updates prices, adds fresh quote)
By John Geddie
LONDON, June 24 Bond yields in the euro zone's
lower rated states fell on Tuesday, as a second round of
weaker-than-expected economic data and the promise of
low-for-longer official rates spurred investor demand.
Germany's Ifo index of business sentiment eased more than
expected in June to its lowest level this year, further evidence
of a stuttering recovery that was highlighted by
lower-than-expected private sector growth data on Monday.
The weak data underlines comments from European Central Bank
President Mario Draghi over the weekend that prolonging banks'
access to unlimited liquidity up to the end of 2016 was a signal
"My underlying thought is that more aggressive ECB should be
more beneficial for non-core spreads," Jussi Hiljanen, chief
fixed income strategist at SEB in Stockholm.
Spanish 10-year yields dropped 5 basis points
to 2.65 percent, while Italy's fell 4 bps to 2.75 percent. Those
in Greece plunged 17 bps to 5.82 percent, while
Portugal's dived 7 bps to 3.47 percent.
Weak economic data boosted bonds this week because it was
seen as increasing chances for central bank support. But it was
also wearing on the credit fundamentals of member states.
S&P's head of EMEA sovereign ratings Moritz Kraemer said
that much work still needed to be done in cutting debt and
boosting growth in the single-currency bloc and that he saw a
"calm period ahead" for ratings actions.
In the money markets, the euro overnight interbank lending
rate edged up from record lows, although strategists predicted a
healthy dose of new liquidity should keep rates contained.
Spot Eonia settled at 0.031 percent after markets
closed on Monday, just above the record low fix of 0.01 percent
Banks borrowed 115 billion euros in one-week loans at the
ECB's regular offering of unlimited cash on Tuesday, 17 billion
more than the loans maturing this week.
This should boost the amount of cash euro zone banks have
beyond what they need for their day-to-day operations
to about 150 billion euros, well above the
three-year low of 70 billion hit at the end of last month.
Banks tend to borrow more at these loan offerings before
monthly and quarterly reporting deadlines, to show a healthy
liquidity position on their balance sheets.
"Liquidity conditions should stay more or less stable ... so
EONIA should stay more or less in this region although we could
see the usual spike just at quarter end," Commerzbank strategist
Benjamin Schroeder said.
But before the announcement, some strategists had been
uncertain of the extent of the take-up given that the ECB's new
negative deposit rate policy is charging banks for keeping their
A Reuters survey of 24 money market traders showed that
banks were expected to borrow 102.5 billion euros.
The same survey estimates that banks will borrow 10 billion
euros of three-month loans from the ECB at a tender on
Wednesday, less than the 12.6 billion redeeming, which should
serve to drain excess liquidity a fraction.
(Additional reporting by Marius Zaharia; Editing by Alison