LONDON: Euro zone government bond yields fell on Friday as the market recovered from the shock of the ECB continuing its stimulus programme at reduced levels next year and shifted its focus to the bond-buying remaining in place for some time.
The European Central Bank on Thursday said it would trim its monthly asset purchases to 60 billion euros from 80 billion euros from April, triggering a bond market sell-off as investors read the move as a tapering of the scheme. However, investors then took comfort from the underlying dovish tone from the central bank.
The ECB promised protracted stimulus to support the region's fragile economic recovery, while the extension of the scheme until the end of 2017 was three months longer than expected.
"It is clear that even if there is a tapering, and we would call it that, the overall message from the ECB yesterday was dovish," said Jan von Gerich, chief strategist at Nordea.
Germany's benchmark 10-year bond yield was down 3 basis points (bps) at 0.37 percent and 9 bps below an 11-month high hit on Thursday after the ECB meeting.
Other euro zone bond yields were 2-4 bps lower, with Portuguese bond yields stabilising around 3.81 percent after surging 24 bps on Thursday in their biggest one-day jump since the results of Britain's referendum on European Union membership on June 24.
Still, analysts said Portuguese bonds remained vulnerable since the ECB's decision not to raise the issuer limit for bond purchases suggested the central bank would continue to struggle to find eligible Portuguese debt for the asset purchase scheme.
According to Societe Generale, buying of Portuguese and Irish bonds has been held at 1 billion euros per month each on the expectation that this will be enough to last until March.
"Now the same pace of buying will have to last until December, with little beneficial relaxation of the constraints," the bank said.
It said there was real risk that Irish and Portuguese bond purchases would be cut by a lot more, possibly below 500 million per month, if the ECB seeks to stretch the scheme to end-2017.
Ireland's central bank is confident it will remain in the programme until December next year and will buy bonds at around 50 percent of the current pace, a source told Reuters on Friday.
To make further buys possible, the ECB relaxed some of its self imposed rules.
Bonds with a maturity between 1 and 2 years will now be included in the asset buys and the bank will also purchase bonds yielding less than its -0.4 percent deposit rate, if necessary.
Those steps have pushed down short-dated German government bond yields, triggering a sharp steeping of the yield curve -- a gift for European banks which typically borrow short-dated interest rates and lend long.
The gap between 2 and 30 year bonds hovered at 190 bps, close to its widest levels since July 2015.
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