Irish and Portuguese bonds singled out as QE losers

Bond yields in Ireland and Portugal surged to two-week highs on Friday as investors singled out countries that may face a scarcity of eligible debt for the European Central Bank’s asset-purchase programme.

A day after the ECB announced it would extend quantitative easing (QE) to the end of 2017, the two countries were left behind in a broad rally as investors worried that they may not benefit fully from the extra nine months of stimulus.

National central banks buy their own government debt under the ECB’s bloc-wide stimulus programme, but the purchases are limited to a third of their outstanding debt.

Ireland’s Central Bank will reduce its pace of purchases under the stimulus scheme – which has stood at around €1 billion euro per month – by around 50 per cent, a source said on Friday.

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The Bank of Portugal said it would not alter the way it purchases debt under QE, and would make sure Portuguese debt was bought until the end of the plan.

“Markets are punishing Ireland and Portugal because some people think the issuer limit will be hit next year,” ING strategist Martin van Vliet said. “They appear to be the victims of this exercise, at least today.”

Bond yield

Ireland’s 10-year government bond yield rose as much as 6 basis points to 1 per cent, while most other euro zone bond yields were 1-5 bps lower on the day.

Portuguese bonds were the other notable underperformer. Ten-year borrowing costs in the indebted southern European state rose as much as 9 basis points to a two-week peak of 3.90 per cent. That comes on top of a 24 bps jump on Thursday – the biggest one-day rise since June 24th when markets reacted to Britain voting to leave the EU.

Société Générale said purchases of Portuguese and Irish government bonds, at the current pace, would end by March. Others said the ECB’s move on Thursday to lower the threshold to include one-year bonds should eke out purchases of Portuguese and Irish debt for a little longer, though not until December 2017.

– Reuters