LONDON: German bond yields held at the lowest levels seen in a year on Thursday and were heading for a fifth consecutive monthly fall on expectations of imminent monetary policy easing from the European Central Bank.
A throng of ECB policymakers have hinted that the bank is preparing the ground for a package measures to be announced at next week's meeting, as it looks to stave off deflation and nurture the bloc's fledgling growth.
A run of weak economic data, which included a surprise uptick in German unemployment on Wednesday, and geopolitical tensions in Ukraine should also ensure support for so-called safe haven assets.
"Even around these levels Bunds are very well supported," Commerzbank analyst Michael Leister said. German 10-year yields, the euro zone borrowing benchmark, dipped 1 basis point to 1.28 percent, consolidating gains after falling to their lowest level in 12 months on Wednesday.
Germany borrowing costs have dropped steadily in each month of this year, a trend not seen since the 2008 financial crisis.
"Momentum is with the bulls for now, and the question is when this will fade as the market gets fully positioned for an ECB move next week," one government bond broker said.
With trading thin on Thursday's European holiday and investors squaring positions into the end of the month, there is unlikely to be a further major spur in the rally this week, strategists say. But with market participants widely expecting the ECB to cut its deposit rate into negative territory and launch a refinancing operation aimed at businesses at its next meeting on June 5, there is also little pressure to sell.
The ECB has warned that investors' pursuit of higher profits could be creating new price bubbles in more vulnerable assets, although this has done little to dampen investor appetite across the credit spectrum.
Spanish 10-year yields opened one basis point (bps) lower at 2.82 percent, just above fresh record lows of 2.8 percent hit Wednesday.
Italian equivalents were unchanged at 2.93 percent, having rallied an impressive 7 bps on Wednesday to sit just a fraction above the record low of 2.89 percent. Italian bonds have been supported by a surprisingly big win for Prime Minister Matteo Renzi's party over the anti-establishment 5-Star Movement in EU parliamentary elections.
This firmer market tone should augur well for an Italian auction on Thursday of 6 to 7.5 billion euros of five- and 10-year bonds, after a smooth sale on Tuesday of 3 billion euros of zero-coupon debt and 1 billion of inflation-linked bonds.
"Abundant redemptions will support demand at the auction," Chiara Cremonesi, fixed income strategist at UniCredit said, pointing out that 20 billion euros of Italian BTPs mature on June 1.
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