LONDON: Yields on the euro zone's lower-rated debt fell on Friday as the European Central Bank's rate cuts and openness to a large-scale bond-buying programme pushed investors towards riskier assets in a quest to maximise returns.
An expected ceasefire between Ukraine government forces and pro-Moscow separatists prevented sharp yield falls in top-rated German Bunds, a traditional hedge against geopolitical concerns.
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 programme of asset-backed securities and covered bond purchases.
ECB President Mario Draghi 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 and Italian 10-year yields fell 5-7 basis points to 2.11 percent and 2.31 percent, respectively. Italy's hit a record low 2.28 percent earlier in the day.
"The main beneficiaries are the peripheral markets and I still think there is scope for spreads to narrow over Bunds, particularly in Spain," said Nick Stamenkovic, bond strategist at RIA Capital Markets. "People are still searching for yield.
While the ECB underpins the short-end of the curve, investors are going to look to extend duration." 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. Ireland's two-year yields were close to 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"
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 1 basis point to 0.96 percent, with their safe-haven appeal dented slightly by prospects of a peace plan between Ukraine and pro-Russian rebels. US non-farm payrolls data due later on Friday also capped market moves across the board.
Speaking on the sidelines of a NATO summit in Wales, Poroshenko said the ceasefire would be conditional on a planned meeting going ahead in Minsk on Friday of envoys from Ukraine, Russia and Europe's OSCE security watchdog.
"It looks likely a ceasefire will be called today, but the durability of such an agreement remains to be seen," said Jan von Gerich, chief strategist at Nordea.
"The scepticism such news would receive should limit the size of the market reaction of the news, especially ahead of the weekend."
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