LONDON: Italian yields fell below 2 percent on Wednesday for the first time as markets expected the European Central Bank to pave the way for government bond purchases when it meets this week.
Most euro zone bond yields headed back towards record lows as data showing business activity in the bloc grew less than expected in November, and a skid in oil prices, have piled on pressure for the ECB to do more to boost growth and fend off deflation. While the ECB is not expected to impose any measures straight after Thursday's meeting, with policymakers still assessing recently launched asset-backed securities and covered bond purchases, President Mario Draghi's news conference will be closely watched for a steer on the timing of further stimulus.
Italian 10-year yields fell 5 basis points to an all-time low of 1.976 percent with Spanish equivalents down by a similar amount at a record low of 1.81 percent , both outperforming benchmark German Bunds.
"The euro zone periphery has been rather well-supported by ongoing QE speculation ... You have a risk of a temporary setback if you get disappointment out of the ECB this week," said Benjamin Schroeder, a rate strategist at Commerzbank. "What you have to look at is how will the oil price be viewed by the ECB, whether they see it as more of a risk to inflation which would point towards increased possibility for QE."
The outlook on the ECB and a rise in German yields from historic lows earlier this week helped demand at an auction in Berlin of 2.5 billion euros of five-year bonds.
The sale bucked a record number of technically "failed" German auctions this year when investors shied away from dwindling yields offered by the euro zone's top-rated issuer.
Five-year German yields slipped 1 basis point to 14 bps, still off lows of about 12 bps seen around last month's lacklustre auction of the paper.
Ten-year Bund yields were unchanged at 0.74 percent, having hit a record low of 0.69 percent last week as bets of further ECB policy easing firmed.
ING strategist Padhraic Garvey said 10-year yields could fall as low as 0.50 percent if the ECB does go ahead with QE.
"The expectation now is that Draghi will have to mention the expansion to QE, but if there's disappointment it wouldn't surprise me if 10-year yields traded towards 80 basis points but ultimately I would see that as a buying opportunity," he said.
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