Portuguese, Italian yields hit new lows as markets refocus on QE

LONDON: Portuguese and Italian bond yields hit record lows on Friday as markets shook off any disappointment over the lack of European Central Bank action at its December meeting.

Traders said investors refocused on the likelihood of future government bond purchases. President Mario Draghi said the ECB will decide early next year whether to ease monetary policy with such purchases, a process called quantitative easing (QE).

Draghi gave his clearest signal yet on Thursday that QE may be on the cards and said opposition from Germany or other euro zone governments would not prevent the bank from acting.

At the meeting, the ECB kept interest rates at record lows but slashed its growth and inflation forecasts.

Italian 10-year yields hit a record low of 1.95 percent and Portuguese yields fell as low as 2.76 percent -- both down 5-7 basis points on the day, reversing Thursday's rise. Ten-year German yields, which set the standard for euro zone borrowing costs, fell 1 bps to 0.76 percent.

"I don't even believe yesterday's move was a repricing of QE probabilities," said Marius Daheim, chief strategist at Bayersiche Landesbank, who expects Bund yields to trade around 0.50 percent when it becomes clear QE is imminent.

"Some people just took profits. Draghi didn't say anything which could be interpreted as discouraging QE expectations." Bundesbank President Jens Weidmann warned the ECB on Friday against copying US and Japanese QE, saying that it would not have the same impact in Europe. Some in the market agree.

"I believe we underestimate the effect of current measures and we overestimate the necessity and utility of QE," said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management. Greek 10-year yields fell 40 basis points to 7.35 percent as the country's deputy prime minister said he expected to have an initial deal with EU/IMF inspectors on their delayed bailout review by Dec. 15.

US non-farm payrolls data later in the day could change the direction for euro zone yields if investors bring forward expectations for Federal Reserve interest rate hikes.

But some analysts said the market was already positioned for a strong number, so the bigger risk was a lower figure, which would support bonds. Analysts expect an increase of 230,000 jobs.