LONDON: Borrowing costs across the euro zone sank to new lows on Friday, with yields in Spain, Italy and Ireland set for their biggest weekly fall in almost four years on rising expectations of central bank policy action following Brexit.
Spain and Italy, where 10-year yields hit their lowest in more than a year, saw the most pronounced market moves amid talk about changes to the European Central Bank's asset purchase programme that could benefit southern Europe.
Bank of England Governor Mark Carney said late on Thursday the central bank would probably need to pump more stimulus into Britain's economy over the summer after the shock of last week's decision by voters to leave the EU, adding fuel to a stellar rally in global bond markets.
Ten-year yields in France, the Netherlands, Ireland and Britain set new record lows, while US Treasury yields tumbled to four-year lows, within striking distance of all-time lows.
"We've got a political crisis in the UK, with an economic one about to hit, so there will be spillovers from that," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "That's why bond markets are pricing in more stimulus and the ECB will have to do what's required."
France's 10-year bond yield hit a record low of 0.15 percent , Dutch yields fell to 0.06 percent and Ireland's 10-year bond yield hit 0.48 percent -- on track for its biggest weekly fall in almost four years.
Spain's 10-year bond yield, down almost 50 basis points this week, meanwhile extended its fall to 1.09 percent, while Italian yields fell more than 10 bps to 1.037 percent - its lowest since March 2015.
ECB WATCH
Analysts attributed the latest fall in peripheral yields to a Bloomberg report that the ECB may consider looser rules for its quantitative easing programme that may include a change in the allocation of bond purchases away from the size of a country's economy towards one that is more in line with outstanding debt.
"It would mean that issuers who have large outstanding debt like Italy would stand to benefit," said DZ Bank strategist Christian Lenk.
The ECB is facing a scarcity of eligible bonds for its bond buying programme in countries that include benchmark issuer Germany where most purchases are made. The issue has become more pressing this week as bond yields fall further in the wake of the Brexit vote.
According to Swiss wealth manager Pictet, more than half the German government bonds on the ECB's shopping list are ineligible for its asset-purchase programme because they yield less than the deposit rate, which is at minus 0.40 percent.
The ECB's QE scheme, launched in March last year, is restricted by several rules aimed at limiting its risks: as well as the yield limit, the ECB cannot hold more than a third of any country's debt or of any specific bond issue.
Changes to the capital key rule will face opposition from some governments and officials as it could lead the ECB towards buying bonds from more heavily-indebted countries.
Sources told Reuters on Friday that the ECB is not currently considering buying government debt out of proportion to euro zone countries' shareholding in the bank and the hurdle for abandoning this capital key is high.
Bond yields moved
off their low after the report.
"There's an extremely high bar for changing the capital key, so I think the ECB is likely to opt for other measures to deal with the scarcity issue," said Peter Chatwell, a strategist at Mizuho.
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