Spain, Italy debt yields hit record lows as QE approaches

LONDON: Spanish, Italian and Portuguese government bond yields fell to record lows on Monday, as investors looked forward to the start of the European Central Bank's quantitative easing programme.

The ECB is expected to give details at Thursday's policy meeting on how it will roll out its programme for buying 60 billion euros worth of securities a month, which is aimed at reviving inflation and the euro zone economy.

Data on Monday showed euro zone consumer prices fell 0.3 percent year-on-year in February, after dropping at an annual rate of 0.6 percent in January and 0.2 percent in December. Economists polled by Reuters had forecast a 0.4 percent decline. Markets showed little reaction.

Data from Germany, Spain and Italy last week had signalled a smaller drop than forecast. But the outlook for inflation remains subdued.

Some analysts expect the ECB to lower its inflation outlook for the year from its December forecast of 0.7 percent, underscoring the anaemic economic conditions in the region that prompted it to agree the QE programme in January.

Spanish and Italian 10-year yields were down 5 basis points to all-time lows of 1.228 percent and 1.296 percent respectively.

Portuguese equivalents fell as much as 10 bps to a record-low 1.754 percent before retreating. Irish equivalents re-tested their all-time low of 0.856 percent.

"Some people were looking at bond buying to start as early as today, but the odds are more for the ECB to fine-tune the remaining operational details on Thursday with the purchases probably starting next Monday," Commerzbank strategist Rainer Guntermann said.

"A lot is probably anticipated by the market by now and this is ensuring this very favourable environment for all spread products, notably the peripheral market where (yield) spreads (over benchmark German Bunds) are lower."

SLIM PREMIUMS

Italian and Spanish 10-year yield premiums over Bunds have fallen below 100 bps, the lowest in almost five years, as yields on top-rated bonds vanish and investors snap up peripheral euro zone bonds.

Yields on German bonds up to seven-year maturity have tumbled into negative territory.

German 10-year yields, the yardstick for euro zone borrowing costs, up at 0.35 percent, not far from last-week's record low of 0.285 percent.

Greek yields rose 12 bps to 9.92 percent. Athens remains under pressure to implement reforms so it can secure the release of aid payments before it runs out of money sometime in March. The government sought to assure its creditors and investors that it can cover its financing needs this month, including a 1.5 billion-euro repayment to the International Monetary Fund.

Jeroen Dijsselbloem, the head of the euro zone finance ministers' group, told the Financial Times that Greece's creditors could pay part of the 7.2 billion-euro remaining in its bailout pot as early as this month, if Athens starts implementing some agreed reforms.