April 8, 2013 / 10:56 AM / 4 years ago

EURO GOVT-Demand for yield lifts Italian, Spanish debt

* Hunt for yield also benefits French paper vs Germany
    * Portugal's debt dips, recovers after court rejects some
    * German yields need fresh impetus to fall below 1.20 pct

    By Ana Nicolaci da Costa
    LONDON, April 8 (Reuters) - Italian and Spanish debt rose on
Monday as investors favored high-yielding bonds over German
ones, while Portuguese paper recovered from early falls on a
court rejection of some austerity measures.
    Non-German euro zone debt was mostly higher, extending
Friday's moves, when the prospect of interest from investors in
Japan after its central bank announced extraordinary stimulus
measures lifted debt markets.
    "Investors, not only in Europe, but across the globe are
struggling to find pick-up or to find high-yielding assets, so
this is supporting not only Spain and Italy but also the likes 
of Belgium and France and the other semi-core countries,"
Michael Leister, senior interest rate strategist at Commerzbank,
    "What is noticeable is indeed this resilience towards the
negative newsflow we had with regards to Portugal."
    Portuguese borrowing costs rose sharply in early trade and
the cost of insuring its bonds against default jumped on
concerns over the country's ability to keep its bailout
programme on track after the constitutional court overturned 900
million euros of planned austerity measures. 
    But traders said there was no real selling and Portuguese
10-year yields turned lower to stand down 1 basis
point on the day at 6.42 percent.
    Ten-year Spanish yields fell 8 bps to 4.70
percent and the Italian equivalent eased 11 bps to
4.30 percent, extending Friday's rally which was boosted by an
influx of cash from Asia following the Bank of Japan's plan.
    French and Belgian borrowing costs touched record lows, with
higher-rated euro zone debt having particularly benefited from
speculation Japanese investors would switch out of local
government debt into euro zone bonds.
    French 10-year bond yields hit a record low at
1.71 percent and the Belgian equivalent at 1.928
    German Bund futures were 17 ticks lower at 146.17,
having risen on Friday to their highest since June 2012 after
U.S. jobs data came in much lower than expected.
    Gloomy economic fundamentals in the euro zone helped take
10-year German yields below 1.20 percent on Friday to their
lowest levels since right before ECB President Mario Draghi
promised in July to do whatever it took to protect the euro. 
    But analysts said German bonds needed a fresh trigger to
rally further and take the 10-year yield below 1.20 percent
 from 1.23 percent currently.
    For Cyril Regnat, fixed income strategist at Natixis, the
German debt rally is overdone. 
    He expected forward Euribor rates to fall because of excess
liquidity and bets for a more accommodative ECB and short-dated 
German yields to stay put, widening the spread between the two.
    "We have this floor at zero percent due to the ECB's
reluctance to cut the deposit rate. While we are expecting a
fall in forward Euribors, we believe that short-dated German
bonds have no more upside potential," Regnat said.
    "So we would be seller of two-year German bonds and we would
receive swap simultaneously.".

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