Yields fall as ECB to push risk on to weaker countries

Low-rated bond yields fell on Friday, with Spain's hitting record lows, after Reuters reported European Central Bank officials are considering ways to ensure weaker countries bear more of the risk and cost of sovereign debt purchases.

Officials, who spoke on condition of anonymity, have told Reuters that the ECB may require central banks in countries such as Greece and Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds.

Analysts said that helped to reinforce bets that some form of quantitative easing was imminent.

"It may be a watered-down form of QE, but from a markets perspective, we would rather have an imperfect QE now than perfect QE much later," said Richard McGuire, senior fixed income strategist at Rabobank.

Higher-yielding debt in the euro zone’s southern periphery, which is likely to perform best under QE, led a broad-based rally.

Spanish 10-year bond yields fell 4 basis points to a record low of 1.70 per cent. Equivalent Italian yields fell 2 bps to 1.96 pe rcent, Portuguese yields dipped 4 bps to 2.76 per cent, and Greek yields fell 20 bps to 8.41 per cent.

German 10-year Bunds - the euro zone benchmark - slipped 1 bps to 0.60 per cent.

The measures being considered could help persuade Germany to support the ECB's purchase of sovereign bonds. Opposition from the Bundesbank is considered one of the few factors that might block quantitative easing next year.

"The Bundesbank is opposed to QE, but if an olive branch is offered, that might be enough to get them on board," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

But others said the measure may undermine the benefits of a QE scheme, citing a fall in European equity markets on Friday.

"Markets have pretty much fully priced in QE for Q1 next year, so if there's anything that looks like throwing a spanner in the works, markets have to take that into account," said Lorcan Roche Kelly, analyst at Agenda Research, Ireland.

“If this is the line being drawn for QE, then QE can’t happen, because it’s not monetary policy any more. That is national central banks doing stuff on their own, implementing their own monetary policy.”

With Europe in easing mode and the US Federal Reserve "patiently" moving towards raising interest rates next year, the premium US bonds offer over German equivalents climbed to historic highs.

The gap between US and German 2-year yields reached its highest in almost eight years at more than 70 basis points. The difference in the 10-year sector is the widest in around 15 years at roughly 160 basis points.

Reuters