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 - fell as low as 0.165 percent in Asian trading, following sharp falls in Japanese and US Treasury yields, before bouncing up slightly to 0.19 percent, 1 basis point up on the day. Yields on other top-rated euro zone bonds were down 1-3 bps lower with investors snapping up bonds at a French auction.
"The down shift in the Fed's macro and median rate expectations come as a big relief," said Commerzbank's Rainer Guntermann.
Italian and Spanish 10-year yields were down 9 bps at 1.25 percent and 1.22 percent, respectively.
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 surged nearly 3 percentage points to 24.65 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.
Euro zone leaders will tell Greece's leftist leaders that time and patience are running out for Athens to implement agreed reforms to avoid a looming cash crunch that could force it out of the single currency.
"The risk of an accident is still very high in our view, which could imply a Greek default and even possibly a Greek exit from the single-currency union, even though it would be neither in the interest of the Greeks nor of the Europeans," Barclays strategists said in a note.
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