LONDON: Spanish bond yields hit record lows on Wednesday as weak lending data and comments by European Central Bank policymakers bolstered expectations the bank will soon provide monetary stimulus, fueling demand for fixed income.
Euro zone government bonds across the credit spectrum have firmed this week as fears receded that big wins by anti-euro parties in EU parliamentary elections might derail fiscal reforms in weaker countries. At the same time, expectations grew that the ECB will ease policy next week.
ECB executive board member Yves Mersch ramped up the rhetoric on Wednesday, saying the June 5 meeting could yield a combination of policies to tackle low inflation and low credit growth, but the timing of implementation could vary. That followed similar hints by ECB President Mario Draghi and colleague Ewald Nowotny earlier this week.
Data showing lending to households an firms in the euro zone fell further in April and money supply shrank, supporting the case for ECB action.
As well as a rate cut, the ECB is preparing a package of other easing measures, Reuters reported earlier this month. They include cutting the deposit rate into negative territory - effectively charging banks to hold cash at the ECB overnight - and measures aimed at helping to increase lending to smaller companies.
"The data newsflow is quite poor and we see that the ECB are clearly confirming that something more than just a rate cut is on the cards for next week and the market is clearly reacting to that," said Jean-Francois Robin, a strategist at Natixis.
Spanish 10-year yields fell 4 basis points to a record low of 2.82 percent, according to Reuters data. Italian equivalents were 6 bps lower at 2.94 perent, not far from the record low of 2.89 percent they reached two weeks ago.
Italian yields extended this week's declines after Prime Minister Matteo Renzi's party scored a surprisingly big win in EU parliamentary elections over the anti-establishment 5-Star Movement.
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