LONDON: German bond yields held at the lowest levels seen in a year on Thursday and were heading for a fifth consecutive monthly fall on expectations of imminent monetary policy easing from the European Central Bank.
A throng of ECB policymakers have hinted that the bank is preparing the ground for a package measures to be announced at next week's meeting, as it looks to stave off deflation and nurture the bloc's fledgling growth.
The accommodative stance of global central banks has provided some stability in financial markets, which in Europe have defied lacklustre economic growth and ongoing geopolitical tensions in Ukraine.
"It shows the impact of central banks. They have managed to eradicate a huge amount of volatility you would otherwise expect," said Owen Callan, a strategist at Danske Bank.
German 10-year yields, the euro zone borrowing benchmark, dipped 1 basis point to 1.28 percent, consolidating gains after falling to their lowest level in 12 months on Wednesday.
German borrowing costs have dropped steadily in each month of this year, a trend not seen since the 2008 financial crisis.
"Even around these levels, Bunds are very well-supported," Commerzbank analyst Michael Leister said.
A holiday in much of Europe kept trading thin on Thursday, and with investors squaring positions at the end of the month, the rally probably will not accelerate this week, strategists said. But market participants widely expect the ECB to cut its deposit rate below zero and begin a refinancing operation aimed at businesses when it meets on June 5, so they feel little pressure to sell, either.
The head of Italy's main employers' association also called on the ECB to intervene to prevent a spiral of recession and deflation in the bloc on Thursday.
PRICE BUBBLES
The ECB has warned that investors' pursuit of higher profits could be creating new price bubbles in more vulnerable assets, but this has done little to curb investor appetite across the credit spectrum.
Italy paid record-low yields to sell five- and 10-year bonds on Thursday, although some traders noted that overall demand from investors was a little weak, which led to some underperformance in peripheral debt.
The rally in Italian 10-year yields this week has paused, with yields rising 1 basis point (bps) to 2.94 percent after the auction. The country's borrowing costs remain just above the record low of 2.89 percent.
Italian bonds have been supported by a surprisingly big win for Prime Minister Matteo Renzi's party over the anti-establishment 5-Star Movement in EU parliamentary elections.
Spanish 10-year yields also traded just above the record lows of 2.80 percent they reached on Wednesday, 2 bps higher on the day at 2.84 percent.
A final reading of Spanish GDP confirmed output had risen 0.4 percent in the first quarter, its biggest increase since Spain's worst economic downturn in modern times began. The report failed to inspire much of a market reaction amid thin trading volumes.
Portuguese equivalents were also 2 bps higher at 3.59 percent. Greek bonds were the best performers in the euro zone periphery, with yields 3 bps lower at 6.29 percent.
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