Southern Europe bonds rally as ECB pushes boundaries with new plan

• The ECB said it would not apply its self-imposed purchase limits for any individual countries and would buy debt with a maturity as short as 70 days.
• Central banks have stepped up efforts to limit the damage from coronavirus, and the US senate cleared a $2 trillion stimulus package overnight.

LONDON: Southern European government bonds rallied on Thursday, with yields on Italian and Greek debt tumbling after the European Central Bank announced the terms of its 750 billion euro bond-buying scheme to limit the impact of the coronavirus crisis.

The ECB said it would not apply its self-imposed purchase limits for any individual countries and would buy debt with a maturity as short as 70 days, well down from one year under previous purchase plans.

This was seen mainly benefiting the bond markets of Italy, Portugal and Greece, after investors sold their bonds heavily in recent days as the virus ravaged the struggling euro zone economy.

The legal decision paves the way for the ECB to hold more than a third of any country's debt - a level it is close to reaching with benchmark bond issuer Germany and some smaller countries - and to focus its stimulus where it is most needed and extend it for as long as it wants.

"This allows the ECB to focus its firepower to support the economies where the crisis has been more severe such as the Italian markets and more importantly allows them to exercise some kind of yield control if spreads widen sharply," said Daniel Lenz, a rates strategist at DZ Bank in Frankfurt.

Central banks have stepped up efforts to limit the damage from coronavirus, and the US senate cleared a $2 trillion stimulus package overnight.

Former European Central Bank President Mario Draghi wrote in a newspaper opinion piece on Wednesday that governments must protect jobs and production capacity, taking over and cancelling private-sector debt to protect jobs.

ITALY, GREECE

Short-dated Italian bonds were among the biggest gainers on Thursday, with yields plunging 16 bps to 0.36pc after rocketing to a more than one-year high above 2pc last week.

Italian 10-year bond yields fell 13 bps to 1.45pc, a near two-week low.

Greek bonds also rallied with yields on 10-year maturities falling by 45 bps to 1.99pc on Thursday. Yields hit a more than one-year high of 4.1pc last week.

The closely watched spread between Italian and German 10-year yields tightened to 171 basis points, well off last week's 14-month high of 319 bps.

"In a nutshell, the decision removes virtually all constraints on asset purchases, in a further boost to the credibility of the ECB's commitment," said Frederik Ducrozet, a strategist at Pictet Asset Management.

Comparatively, yields in core European government debt markets such as Germany and France eased marginally, with yields on 10-year German government debt easing only 3 bps to -0.30pc.