* French, Belgium debt seen benefiting most from yield hunt
* Italy, Spain debt rallies in wake of Japan stimulus plan
* Portugal debt underperforms after court austerity ruling
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, April 8 French and Belgian borrowing
costs hit record lows on Monday, extending last week's falls as
investors sought bonds with higher yields than Germany in the
wake of Japan's unprecedented stimulus plans.
Portuguese bonds underperformed most euro zone debt after a
court rejected some planned austerity measures but the moves
were modest - an early rise in yields turned around as the
government scrambled to find new spending cuts.
Prices of most other euro zone debt - with the exception of
low-risk German benchmarks - rose, extending Friday's gains
after the Bank of Japan unveiled a plan to buy $1.4 trillion in
assets and drove Japanese yields to record lows. This stoked
bets Asian investors would seek higher returns elsewhere.
"There is a strong appetite for yields...Money has to be
allocated to other currencies. There are limits to how much
these investors can place in dollar bonds and (U.S.) Treasuries
so they have to go into European bonds," said Riccardo Barbieri,
a strategist at Mizuho in London.
French and Belgian 10-year borrowing costs
touched record lows at 1.71 and 1.97 percent
respectively. Such higher-rated debt has particularly benefited
from speculation Japanese investors will switch out of local
bonds into the euro zone.
The French 10-year yield premium over German Bunds is at its
lowest since October 2012 at around 50 basis points, with
Barbieri expecting it to fall a further 10 bps in coming days.
"Investors are having to pick a place to try to earn a
spread against Germany and they are still relatively comfortable
with France because if something goes wrong in Europe it will
have to be in the periphery," he said.
Italian 10-year yields fell 7 bps on the day
to 4.34 percent while 10-year Spanish yields were
3 bps lower at 4.75, also extending Friday's rally.
Michael Leister, senior interest rate strategist at
Commerzbank, said investors across the globe were seeking
"This is supporting not only Spain and Italy but also the
likes of Belgium and France and the other semi-core countries,"
he said. "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 last stand 1 basis
point up on the day at 6.44 percent.
The resilience in peripheral bonds led investors to pocket
profits in German Bunds on a rally last week following a weak
U.S. labour market report and European Central Bank signals on
Thursday that interest rates could be cut in the coming months.
Bund futures fell 26 ticks on the day to settle at
146.08, having risen on Friday to their highest since June 2012.
Gloomy economic fundamentals in the euro zone also helped
take 10-year German yields below 1.20 percent on Friday to their
lowest levels since just before ECB President Mario Draghi
promised in July to do whatever it took to protect the euro.
The 10-year yield was last up 2 bps at 1.24 percent
with some analysts seeing no impetus for a
sell-off in core bond markets given the downbeat economic
outlook, political impasse in Italy and uncertainty over
Portugal's austerity programme.
"In the near term, the data releases and economic surveys
for April are unlikely to bring any significant positive
surprises...The Bund (yield) could go lower than 1.20 (percent).
It traded briefly below 1.15 percent in July (2012). It's only a
question of time before it goes back there," Barbieri said.