LONDON: Spanish and Italian government bond yields fell on Monday after the euro zone bank stress tests showed no major bank was in trouble, while those that failed having only a relatively small capital hole to fill.
Yields remained around the day's lows after Germany's Ifo business survey came in weaker than expected, reflecting a calmer market after a raft of poor data caused one of the sharpest sell-offs in peripheral bonds two weeks ago.
Only 25 banks of the 130 tested failed the European Central Bank's assessment at the end of last year, with a total 25 billion euro capital shortfall. Investors saw this as manageable and reassuring.
Of the banks that failed, a dozen had already raised 15 billion euros to make repairs. The main problems were in Italy, Cyprus and Greece, with Italy facing the biggest challenge as nine of its banks fell short. Two still have gaps to plug.
The situation in Italy did not surprise the market, however, and did not stop yields on its debt falling on Monday, though they fell less than their Spanish counterparts.
Spanish 10-year yields fell 5 basis points to 2.13 percent, while Italian yields fell 2 basis points to 2.50 percent.
"There's some relief this morning that there were no Spanish banks in the test that failed. As for Italy - that was already priced in," said Emile Cardon, market economist at Rabobank.
Traders said part of Italy's underperformance versus Spain could be explained by plans to sell 3.5 billion euros of zero-coupon and inflation-linked bonds on Tuesday, as well as medium- and long-term debt on Thursday.
ECONOMIC WEAKNESS
Ten-year German Bund yields, which set the standard for euro zone borrowing costs, fell 1 basis point to 0.88 percent.
They reversed an earlier rise after a survey by the Munich-based Ifo think-tank showed German business sentiment deteriorating for a sixth month running to its lowest in almost two years.
The figures reinforced expectations of further ECB monetary policy easing, potentially via a programme of sovereign bond purchases, known as quantitative easing (QE).
The sell-off from two weeks ago on the back of weak data was put off by talk last week that the ECB was planning to top up its programme of buying asset backed securities and covered bonds with a corporate debt buying scheme from next year.
Although some remain sceptical this would be enough to lift inflation from near-zero levels, the possibility of further measures to ease policy is a reminder of the ECB's commitment to "do whatever it takes" to save the euro.
"Poor data in a sense that it increases the likelihood of ECB taking the next step towards a large-scale traditional quantitative easing would be, other things equal, beneficial, for peripheral spreads," said Jussi Hiljanen, chief fixed income strategist at SEB.
"Of course if you took a longer perspective, low inflation - or deflation in some euro zone countries - would make the task of stabilising debt even more difficult. There are and will be fundamental problems when it comes to the debt burden."
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