LONDON: German bond yields fell to record lows on Thursday after the United States signalled it was in no rush to push up interest rates, while borrowing costs in Athens spiralled ahead of debt talks with its creditors.
Hints that the world's largest economy may hold off tightening monetary policy brought relief across other euro zone markets, even with deposits flowing out of Greek banks and its government expected to run out of cash by the end of the month.
Yields on low-rated Italian and Spanish bonds dropped as attention also returned to the European Central Bank's trillion euro bond-buying scheme.
"When you get periods of stress as we have had in Greece, it focuses the mind on whether peripheral debt is an accident waiting to happen," said Jonathan Lowe, portfolio manager in the Global Multi-Asset Group at JPMorgan Asset Management.
"I think personally that spreads on peripheral debt are sufficiently strong and that will encourage some people back into these names as they see there is a lender of last resort through the actions of the ECB."
German 10-year yields -- the euro zone benchmark -- tracked earlier moves in U.S Treasury and Japanese bond yields, falling 2 basis points to 0.18 percent.
The U.S. central bank, as expected, removed a reference to being "patient" on rates from Wednesday's policy statement, but cut its growth and inflation expectations.
"The down shift in the Fed's macro and median rate expectations ... come as a big relief," said Commerzbank's Rainer Guntermann.
Most other euro zone equivalents dropped, with Italy and Spain's down 11 bps at 1.23 and 1.20 percent, respectively. Investors snapped up bonds at a French auction.
Bids placed for the French bonds on sale came to more than twice the amount offered, another sign that investors are nervous that the ECB's purchases are creating a shortage of top-rated debt.
Banks also snapped up 97.8 billion euros ($104.50 billion) in cheap long-term loans from the ECB, far exceeding expectations and providing further evidence that a nascent euro zone recovery is spurring lending.
GREEK DRAMA
Greece missed the broad-based rally, however. Two-year yields climbed more than 150 bps to 23.25 percent, their highest since the bond was issued in mid-2014.
The market rout came before talks between cash-strapped Athens and its creditors at the sidelines of the EU summit later on Thursday. More money flowed out of Greek banks, exacerbating the moves. http://link.reuters.com/dud38s
An index of Greek banking shares dropped to its all-time low. It was last trading down 1.1 percent at 1047 GMT.
The European Central Bank on Wednesday raised the cap on emergency liquidity assistance that Greek banks can draw from the country's central bank by an incremental 400 million euros, keeping pressure on Athens to strike a new funding deal.
Greece's deputy prime minister said on Thursday that the country needs cooperation from European partners to avert a liquidity problem. But euro zone leaders will tell Greece that time and patience are running out for its government to implement agreed reforms.
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