LONDON: Yields on the euro zone's lower rated bonds rose on Wednesday as upcoming debt auctions prompted investors to book profits after a fall to record lows triggered by the European Central Bank's latest easing measures.
The ECB cut all its interest rates last week and promised more liquidity for banks, while leaving the door open for a programme of outright asset purchases.
The measures pushed 10-year yields in Italy, Spain and Portugal 20-30 basis points lower, to record or close-to-record lows on Monday, before rebounding somewhat.
On Wednesday, Spanish and Italian yields were 3 basis points higher at 2.66 percent and 2.82 percent, respectively.
Portuguese yields rose 2 bps to 3.39 percent before Lisbon's first debt auction since the end of its bailout programme in May.
"This is profit taking. Moves that we thought would happen over two or three weeks happened in two or three days," one trader said. "With supply from Portugal today and from Italy tomorrow, the periphery may stay a bit under pressure." Portugal will offer up to 750 million euros in 10-year bonds, while Italy plans to sell up to 8.5 billion euros of three-, seven- and 30-year bonds on Thursday. Among top-rated euro zone borrowers, Germany will hold an auction of up to 4 billion euros of two-year bonds on Wednesday.
The ECB's easing measures should keep short-term interest rates anchored and ensure Germany has enough demand for its bonds, while lower-rated bonds should attract yield-hungry investors unhappy with minimal returns in core Europe.
Citi strategists expect Portuguese yields to resume falling, describing the market environment as one "of intense hunt for yield and improving domestic fundamentals."
INFLATION CHECK
Analysts doubt a reversal of the periphery's two-year-old rally is close. Measures of the market's inflation expectations have moved higher since the ECB meeting, but the scale of their rise has been too limited so far to suggest the recent rise in bond yields had much to do with that.
One measure that is closely watched by the ECB, the euro five-year, five-year breakeven forward, traded near three-month highs at 2.14 percent, but remained more than 10 basis points below 2014 peaks.
The instrument gauges the projected difference between the yields of five-year inflation-linked debt and similarly-dated conventional bonds five years into the future.
It has moved in the direction the ECB would have wanted in the past few days, but only by 3 bps, compared with roughly 10 bps in nominal 10-year yields - not enough to be considered a significant repricing of long-term inflation expectations.
"The rebound is too small to come at that conclusion," said Ralf Umlauf, an analyst at Helaba Landesbank Hessen-Thueringen. "We think the rise in yields is mainly driven by profit taking."
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