Spanish yields below 2pc for first time as ECB bond buying eyed

LONDON: Spanish 10-year bond yields broke on Monday below 2 percent for the first time as the prospect of the European Central Bank expanding its asset purchases to include government debt drove down euro zone yields.

Italian, Irish, French and Austrian yields also fell to fresh lows, extending last week's falls after ECB President Mario Draghi said on Friday that "excessively low" inflation had to be raised quickly by whatever means necessary.

This was his clearest signal yet that government bond purchases may not be far away.

It also echoed his 2012 pledge to do "whatever it takes" to save the euro, which sparked a two-year rally in euro zone sovereign bonds.

Data this week will show just how low inflation has fallen.

A Reuters poll forecasts a relapse to 0.3 percent in November, far below the ECB's near 2 percent target.

"We expect prices to go down further and this is something Draghi expects as well," said DZ Bank market strategist Felix Hermann. "Sure, there are still some opponents to his policy stance but I'm sure Draghi wouldn't be leaning out of the window that strongly if he knew there was no chance for a majority.

It's a clear sign that. QE is just behind the next corner." Spanish 10-year yields slid as low as 1.966 percent, while their Italian peers fell to 2.14 percent, both down 5 basis points on the day and shrinking their premiums over benchmark German debt near to 2010 lows.

Spain and Italy were seen as bailout candidates at the height of the debt crisis in mid-2012, since when their borrowing costs have slid from levels above 7 and 6 percent respectively.

Spanish yields are 35 bps below those of US 10-year Treasuries, the global benchmark, as the ECB prints money just as the Federal Reserve has wound up its bond purchases.

Goldman Sachs assigned a greater than 50 percent probability to the ECB expanding its purchases to sovereign bonds from secured debt.

"We would initiate a trade recommendation to go long a basket of 10-year Italian, Spanish and Portuguese government bonds versus a basket of German and French counterparts for a targeted spread compression of at least 50 basis points," the bank's strategists said in a note.

Bund yields were 1.4 bps up at 0.79 percent after German business sentiment rebounded in November but analysts said it was unlikely to change the overall downward trend in yields.