February 28, 2014 / 12:45 PM / in 4 years

Persistent ECB easing bets push Spanish yields to historical lows

* Euro zone CPI picks up in Feb, stays far below target

* German yields, money market rates push higher

* Spanish, Italian, Greek yields stay near multi-year lows

* Expectations of further ECB easing remain

By Marius Zaharia

LONDON, Feb 28 (Reuters) - Spanish bond yields reached new historical lows on Friday as persistent expectations the European Central Bank will loosen monetary policy further supported lower-rated debt even though inflation ticked up.

A slight rise in euro zone inflation in February, confounding forecasts of a fall, pushed German 10-year Bund yields, the benchmark for euro zone borrowing costs, higher.

Money market rates also edged up, suggesting ECB easing expectations cooled somewhat. However, they remained at subdued levels that still implied markets believed that, with price rises still way below the central bank’s target, it might eventually move to ensure the euro zone avoids deflation.

“There’s been a bit of an adjustment - the market was expecting a bit lower figures, particularly after the German numbers yesterday,” ICAP strategist Philip Tyson said.

“(The pick up in inflation) may be sufficient to allow the ECB to keep playing for time next week. But ... the pressure on the ECB to ease won’t go away.”

If the ECB relaxes monetary policy further, yields on top-rated German Bunds will remain at ultra-low levels, prompting investors to take on more risk and put some of their money into lower-ranked bonds in search of higher returns.

Spanish 10-year yields hit eight-year lows of 3.48 percent before the inflation data and retreated only to 3.50 percent afterwards. Five-year yields stood at 2.01 percent after briefly falling below 2 percent for the first time in at least 20 years, according to Reuters data.

Greek 10-year yields fell below 7 percent for the first time since April 2010, hitting levels seen before Europe and the International Monetary Fund bailed out Athens.

They last stood at 6.88 percent, having fallen as low as 6.78 percent earlier.

“It’s less clear cut that the ECB will do something next week ... so there was a small corrective move,” said Jean-Francois Robin, global head of strategy at Natixis in Paris.

“But if you look at Greek yields below 7 percent ... and at other peripheral yields, it’s clear that the carry trade is continuing in Europe.”


Money market rates edged higher, but expectations of more ECB easing have not been wiped out completely.

The Eonia rate dated for the March 6 meeting stood at 0.15 percent, rising almost 2 bps after inflation figures. It was slightly lower than the 0.162 percent spot rate. Longer-dated Eonia rates were lower, trading at roughly 11 bps on maturities from June to November, reflecting expectations the ECB may still act later in the year.

“I don’t think today’s inflation will be decisive in any way or another. I still think a lot of people expect something from the ECB,” said Anders Svendsen, chief analyst at Nordea.

February’s blip only took inflation to 0.8 percent, still well below the ECB’s target of just below 2 percent and within the “danger zone” of below 1 percent drawn by the bank’s president Mario Draghi.

A third of the economists polled by Reuters before the inflation figures saw a cut in interest rates at Thursday’s meeting, while a growing minority expect the ECB to eventually purchase government bonds and print money.

“It’s still 0.8 percent only, so it doesn’t mean the ECB won’t do something down the road,” said Robin at Natixis.

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