LONDON: Most euro zone bond yields bounced off record lows on Tuesday as investors waited for the European Central Bank to provide more details of its trillion euro quantitative easing (QE) programme later this week.
The pause in the rally that drove Italian, Spanish and Portuguese yields to fresh record lows was expected to be temporary, with underlying market sentiment remaining firm before the QE programme kicks off this month.
"D-day is drawing near," said ING strategist Martin van Vliet, expecting more details on the breakdown and procedure of asset purchases.
In an otherwise light data schedule on Tuesday, unexpectedly strong German retail sales provided further evidence that growth is picking up in the bloc's largest economy. This gave a boost to stock markets, while safer fixed-income assets flatlined.
German 10-year yields, the euro zone benchmark, were up 1 basis point at 0.37 percent, off a low of 0.28 percent hit last week.
Italian and Spanish equivalents were 3 basis points up at 1.37 and 1.30 percent respectively, retreating from troughs of 1.30 and 1.23 percent touched on Monday, while Portuguese 10-year yields were 5 bps higher at 1.92 percent.
Many analysts see scope for further falls in peripheral euro zone bond yields when the ECB starts buying as it will drive investors deeper into lower-rated debt offering higher returns than core bonds.
"There's still some room for yield reduction but that's more a short-term view because at some point we'll be close to the situation where that convergence trade will disappear. We're still a little bit far from that," Unigestion's head of cross asset solutions, Jerome Teiletche, said.
MIXED SIGNALS
Greek bond yields see-sawed on conflicting signals about whether euro zone countries are discussing a third bailout for the country that triggered the region's debt crisis in 2010.
Greek 10-year yields were a touch lower at 9.81 percent, but with shorter-dated yields remaining higher, there are still signs investors fear the country could once again default.
Despite a four-month extension to its existing bailout that it negotiated with the euro zone last month, Greece still faces a steep decline in revenues and could run out of cash by the end of March.
Spain's economy minister said on Monday that euro zone countries were discussing a third bailout for Greece worth 30 billion to 50 billion euros, but EU officials said there were no such talks.
Ratings agency Fitch warned on Tuesday that Greece could face further downgrades if it does not secure a "durable" aid agreement with the rest of the euro zone.
A survey of mainly Germany-based investors showed the chance of Greece leaving the euro zone in the next 12 months had risen to its highest level since late 2012, even after Europe extended Athens's financial lifeline.
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