January 12, 2015 / 8:55 AM / 5 years ago

Lower-rated bond yields dip as ECB's Visco urges govt bond buying

LONDON, Jan 12 (Reuters) - Spanish and Italian bond yields slipped on Monday after a European Central Bank official said the risk of deflation in the euro zone should not be underestimated and urged the bank to buy government debt.

ECB Governing Council member Ignazio Visco made the comments to German newspaper Welt am Sonntag as policymakers consider buying sovereign debt, in so-called quantitative easing, to prevent the euro zone slipping into a deflationary spiral. Markets speculate the ECB could announce such a move as early as at its policy meeting on Jan. 22.

“The comments emphasise that the ECB governors are seriously considering policy action. The expectation is they could already announce a bond buying programme next week,” said Mathias van der Jeugt, a strategist at KBC Securities.

Spanish and Italian 10-year yields were down 2-3 basis points at 1.72 percent and 1.87 percent percent respectively.

Lower-rated bonds had a bit of a wobble last week, with yields pulling away from record lows as debate on the scope and form of ECB bond purchases raised concerns that it could fall short of the unlimited money printing investors expect.

Sources close to the discussions told Reuters that the scheme may see national central banks buy some of the bonds at their own risk — a nod to German concerns about bigger economies shouldering more risk from the bloc’s periphery.

Several options for a QE scheme are being discussed ahead of the ECB’s Jan. 22 policy meeting. But markets and many economists believe anything short of an unlimited money-printing programme will fail to revive the moribund euro zone economy.

Focus was also turning to the European Court of Justice’s preliminary opinion on Wednesday about the ECB’s earlier bond buying plan, which was never launched, after Germany’s Constitutional Court expressed deep reservations about it but decided to pass it up to the ECJ.

If the ECJ’S adviser expresses reservations about the Outright Monetary Transactions, it could have far-reaching implications for the shape of QE.

Societe Generale analysts, however said a watered-down programme could still see bondholders end up having the “best of both worlds” with the ECB as a big buyer but a still weak economy teetering on the brink of deflation holding out the promise of more stimulus down the line.

“We’d still see higher-yielding euro zone government bonds doing well in this configuration over the course of 2015. That said, the immediate reaction just now risks disappointment,” they said in note. (Editing by Susan Fenton)

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