* Peripheral debt outperforms as investors seek yield after ECB
* Weak U.S. jobs report reinforces bets Fed to wait to hike rates
* ECB cut all its rates, announced ABS buying programme (Updates with Italy, Spain, Irish yields at new record lows)
By Marius Zaharia and Emelia Sithole-Matarise
LONDON, Sept 5 (Reuters) - Yields on Italian, Irish and Spanish bonds hit all-time lows on Friday in a broad-based rally in euro zone debt spurred by the European Central Bank’s rate cuts and openness to a large-scale bond-buying programme.
Data showing the U.S. economy created fewer jobs than forecast last month reinforced the view that the Federal Reserve would wait until later next year to start raising interest rates. This supported investors’ appetite for riskier assets including lower-rated euro zone debt.
Peripheral euro zone bonds have led the bond rally since the ECB cut its main refinancing rate to 0.05 percent, raised the penalty for banks keeping money overnight in central bank deposits to 0.20 percent, and announced a new scheme of asset-backed securities and covered bond purchases.
ECB President Mario Draghi on Thursday also left the door open to bond purchases with newly printed money, a tool known as quantitative easing, or QE, although questions remain over German resistance to such a step.
“This was a pretty dramatic step. All they’ve got left to do now is full QE,” said Alan McQuaid, chief economist at Merrion Stockbrokers.
Spanish, Italian and Irish 10-year yields fell 9-11 basis points to all-time lows of 2.05 percent, 2.26 and 1.643, percent, respectively. Peripheral bonds have benefited most from the ECB’s largesse, which has fueled investors’ hunt for higher returns as yields on top-rated bonds have dwindled.
Two-year yields were negative in Germany, the Netherlands, Belgium, Austria, France and Finland - meaning investors are effectively paying those governments to hold their money. Yields on two-year bonds issued by Ireland, which emerged from an international bailout late last year, were near zero.
The highest yielding two-year bond in the euro zone was Portugal’s at 0.59 percent, down from over 22 percent at the height of the crisis in 2011.
“ONLY A MATTER OF TIME”
Many in the market see scope for 10-year peripheral bond yields to narrow their gap further over German benchmarks as investors seek to maximise returns.
“People are still searching for yield. While the ECB underpins the short end of the curve, investors are going to look to extend duration,” said Stamenkovic, bond strategist at RIA Capital Markets.
Stamenkovic said it was “only a matter of time” until the yield premium offered by Spanish and Italian bonds over German Bunds shrinks below 100 bps. Citi strategists, saying “the ECB has turbo-charged the hunt for yield again”, see Spanish bonds yielding just 75 bps over Bunds in the fourth quarter.
Bund yields, the benchmark for euro zone borrowing costs, were down 3 basis points at 0.94 percent after the below-forecast U.S. labour data. The U.S. numbers offset the impact of news that Ukraine and pro-Russian rebels had agreed a ceasefire. (Editing by Andrew Roche)