March 9, 2018 / 8:38 AM / 6 months ago

REFILE-UPDATE 2-Southern European bonds set for best week in months thanks to go-slow ECB

(Adds dropped word in title in paragraph 11)

* Spanish, Portuguese bond yields down 12 bps this week

* Biggest falls since July, Nov 2017

* ECB gives up on bigger bond buys but stays cautious

* U.S. jobs data coming up

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe and Fanny Potkin

LONDON, March 9 (Reuters) - Borrowing costs in Spain and Portugal were on track for their biggest weekly fall in at least four months on Friday, a day after the ECB gave up a pledge to increase bond buys if needed but signalled a slow route out of its massive stimulus.

Most bond yields across the single currency bloc rose 1-3 basis points, reflecting some caution ahead of closely-watched U.S. monthly jobs data due at 1330 GMT.

But they remained close to lows struck on Thursday after the European Central Bank took just a small step towards weaning the euro zone economy off its lavish stimulus by dropping its easing bias.

Having revived euro zone growth, the ECB has been dialling back its support in tiny increments, fearing that any big change could unravel its work and force an embarrassing and economically damaging policy reversal.

It’s that cautious stance that brought comfort to bond investors, especially in southern Europe, a big beneficiary of the 2.55 trillion euro ($3.16 trillion) stimulus scheme.

“The ECB gave a reassuring message that QE would not come to a swift end in September and stated that the discussion on rate hikes and their timing had just started,” said Commerzbank rates strategist Rainer Guntermann.

“This sent relief across the board, particularly for the periphery. It also mostly shut down expectations by some that early 2019 rate hikes were on the cards.”

Spain’s 10-year bond yield, up 1.5 bps at 1.42 percent , was set to end the week down around 12 bps — its biggest weekly fall since July last year.

Portuguese bond yields pulled back from Thursday’s six-week low around 1.79 percent, but were set for their biggest weekly fall since November, of around 12 bps.

The gap between 10-year Italian and German bond yields was at 134 basis points, and close to levels hit on Thursday that marked the tightest in two weeks.

“The ECB wants to see evidence, data, before acting further, which suggests a gradual exit from here,” Luigi Speranza, head of European economics at BNP Paribas said on a call with reporters.

Analysts said reports that Italy’s centre-right alliance was reaching out to lawmakers from the Democratic Party to seek support for a broad governing alliance after Sunday’s inconclusive election was also supporting Italian debt.

The leader of Italy’s anti-establishment 5-Star Movement said on Friday his party was preparing economic policy proposals for other parties as a way of finding common ground to form a government.

News that U.S. President Donald Trump is prepared to meet North Korea’s Kim Jong Un in what would be the first face-to-face encounter between the two countries’ leaders helped ease fears about geopolitical tensions, denting safe-haven bonds.

Germany’s 10-year bond yield rose 1 bps to 0.64 percent DE10YT-RR. The gap between five and 30-year bond yields was wider at 125 bps, having hit its tightest since November 2016 on Thursday at around 121 bps.

Reporting by Dhara Ranasinghe and Fanny Potkin Editing by Catherine Evans

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