Italian yields hit one-year low as ECB easing talk returns

LONDON: Italian 10-year bond yields hit their lowest in almost a year on Friday, as yields fell around the euro zone after comments from the European Central Bank that appeared to put further interest rate cuts back on the table.

ECB Executive Board Member Peter Praet was quoted as saying that interest rates had not reached their lower limit and that a rate reduction remained part of the ECB's armoury.

His boss Mario Draghi had said late on Thursday that he expected interest rates to stay low or be even lower than now, for a considerable period.

That contrasts Draghi's remark following last Thursday's ECB meeting that he did not anticipate more rate cuts - which prompted markets to scale back expectations for further reductions in the deposit rate.

"When we had the ECB meeting last week, it sounded like the ECB would be nearing the end of its rate-cutting cycle and would prefer QE measures in the future," said Rene Albrecht, a market strategist at DZ Bank. "Now they are scaling back that statement."

The yield on Italy's 10-year bond fell 3 basis points to 1.241 percent, the lowest since April 2015. Portuguese 10-year yields hit their lowest in seven weeks at 2.675 percent. Ten-year yields in Germany, France and Spain all fell to their lowest levels since last Thursday's ECB meeting, with most euro zone yields 2-3 bps down on the day.

"On balance, Praet's comments confirm our view that the central bank remains in easing mode as he also stressed that asset purchases would continue for as long as necessary to lift inflation up," Mizuho rates strategist Antoine Bouvet said in a note.

Money market rates priced in about a 60-70 percent chance of another 10 basis-point cut in the ECB's deposit rate by the end of the year, up from 50 percent before the latest ECB comments.

This week's rally in the euro to one-month highs against the dollar, after the US Federal Reserve suggested it expected to deliver two rate hikes this year, half the number seen in December, has also fuelled talk of more ECB easing.

A firmer currency complicates the ECB's task of reflating the euro zone economy as a strong euro means cheaper imports that drag down inflation. Markets also awaited a host of ratings decisions later in the day.

Standard and Poor's is expected to report on Finland, Austria and Portugal.

Both Moody's and S&P report on Cyprus, and S&P may also update its view on the wealthy Spanish region of Catalonia, which it downgraded in October and put on a negative outlook.

Earlier on Friday, Moody's said eurozone sovereigns' ratings will likely remain stable in 2016-2017, but that a decline on fiscal consolidation, a lack of progress on structural reforms and a rise in political risks all limit the upside potential.