April 9, 2019 / 9:39 AM / 14 days ago

UPDATE 2-Hopes for dovish ECB power rally in peripheral euro zone bonds

* Italy’s 30-year bond yield falls to lowest since July

* Portuguese yields hit fresh historic lows

* Hunt for yield, hopes for dovish ECB boost periphery

* ECB meets on Wednesday

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds IMF report, updates prices)

By Dhara Ranasinghe

LONDON, April 9 (Reuters) - Government borrowing costs in southern Europe hit fresh lows on Tuesday, pushed down by hopes that this week’s European Central Bank meeting will reinforce expectations for supportive policy measures in the months ahead.

In generally subdued trade, peripheral markets continued their recent outperformance.

Portugal’s 10-year government bond yield fell to 1.205 percent, its lowest level in at least 25 years, while Italy’s 30-year bond yield tumbled four basis points to 3.407 percent - its lowest level since July.

Greek 10-year bond yields, meanwhile, hit a fresh 13-year low of 3.45 percent, having dropped on Monday below the 3.50 percent mark for the first time since June 2006.

“There is a hunt for yield at play, there is still a lot of liquidity provided by central banks and only a limited number of assets investors can buy,” said Mizuho rates strategist Antoine Bouvet.

“Add to that the greater likelihood of ECB restarting QE (quantitative easing) potentially at a later date if the economy deteriorates, and in this context, things are ripe for an outperformance of long-end peripheral bonds.”

The ECB meets on Wednesday - a gathering that takes place against a backdrop of speculation about whether the central bank will in coming months adopt tiered interest rates to alleviate pressure on the banking sector from negative interest rates.

Investors are also hoping the ECB may provide more details on its plans to issue a fresh round of cheap multi-year loans to banks to support economic growth. These loans have been particularly supportive of southern European economies such as Spain and Italy where the take-up among banks has been strong.

“The message that was established in March is that we are now looking at a more dovish ECB,” said Matt Cairns, a fixed income strategist at Rabobank.

“They (ECB officials) could provide details on the next TLTRO that’s giving these peripheral markets a bit of boost.”

Recent talk of an early loan repayment to the International Monetary Fund by Greece, which also plans to issue a new bond soon, have helped lift sentiment towards peripheral markets.

Other higher-rated bond markets meanwhile drew some support from concern about U.S./European trade tensions.

The U.S. Trade Representative on Monday proposed a list of European Union products, ranging from large commercial aircraft and parts to dairy products and wine, on which to slap tariffs as retaliation for European aircraft subsidies.

Germany’s 10-year bond yield hovered around zero percent , but it is up 9 basis points from 2-1/2 year lows of minus 0.09 percent hit last month, though worries persist over global growth.

The IMF on Tuesday became the latest to cut its global economic growth forecasts for 2019 and said growth could slow further due to trade tensions and a potentially disorderly British exit from the European Union.

Reporting by Dhara Ranasinghe Additional reporting by Virginia Furness Editing by Catherine Evans, Susan Fenton and Frances Kerry

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