LONDON, Feb 21 (Reuters) - Spanish and Italian bond yields fell back towards eight-year lows on Friday in a broad based rally in euro zone debt as uncertainty over the bloc's growth outlook bolstered expectations of further ECB policy easing.
Surveys on Thursday showed business activity within the currency bloc did not expand as much as expected in February, in a sign the economic recovery remained fragile, particularly outside the region's biggest economy, Germany.
Data from China also painted a grim picture of the country's manufacturing sector, raising questions about the outlook for global growth.
With euro zone inflation running well below the European Central Bank's target of just under 2 percent, this is keeping alive bets the bank will loosen policy further later this year.
"Expectations seemed to really gain traction that there is a decent chance of them (the ECB) doing something," Commerzbank rate strategist David Schnautz said. "There's talk that they'll at least leave the door open for QE (quantitative easing)."
Spanish and Italian yields dropped 5 basis points to 3.55 percent and 3.61 percent respectively, back near eight-year lows hit on Wednesday.
A smooth debt auction on Thursday which saw Spain meet a quarter of its 2014 funding target is also clearing the way for Spanish bonds to outperform Italian debt, analysts said.
Rome is scheduled to sell bonds next week. Moody's is expected to at least maintain its stable outlook on Spain's credit worthiness later on Friday after it upgraded Italy's outlook to stable from negative last week.
QE FROM ECB?
Ultra-low euro zone inflation is prompting speculation that the ECB might eventually embark on a government bond buying scheme akin to the Federal Reserve's quantitative easing.
Last week ECB policymaker Ewald Nowotny said he did not believe such a programme would be easy for the ECB due to rules forbidding it from state financing.
Bond and money markets are not pricing in such a move from the ECB but BNP Paribas anticipated action in the second half of the year which they said would aggressively drive down Italian and Spanish yields.
"Actual inflation is very low and is probably set to persist at low levels for some time. The risk is to see inflation expectations declining substantially so the ECB has to keep inflation expectations alive and QE is one of the more effective ways to do this," said BNP Paribas' Patrick Jacq.
He said Spanish and Italian 10-year yields could fall to 2.90 percent by the end of the year. Societe Generale economists, however, saw only a 15 percent probability of QE from the ECB saying it was more likely to provide further cheap long-term loans to the banking system, deliver a small rate cut or stop soaking up money it used to buy crisis-era euro zone bonds to boost excess liquidity.
"From a strategic point of view, we see risks heavily skewed towards the ECB using such tools to buy time and send a dovish signal as they continue to gauge the need for much bigger action," they said in a note. Yields on higher-rated euro zone bonds also fell.
German 10-year yields were down 3 bps at 1.67 percent. Austrian bonds were supported by Fitch's affirmation of the country's triple-A rating with a stable outlook. The agency said the government could handle the cost of restructuring nationalised bank Hypo Alpe Adria.
yahoo.com
Surveys on Thursday showed business activity within the currency bloc did not expand as much as expected in February, in a sign the economic recovery remained fragile, particularly outside the region's biggest economy, Germany.
Data from China also painted a grim picture of the country's manufacturing sector, raising questions about the outlook for global growth.
With euro zone inflation running well below the European Central Bank's target of just under 2 percent, this is keeping alive bets the bank will loosen policy further later this year.
"Expectations seemed to really gain traction that there is a decent chance of them (the ECB) doing something," Commerzbank rate strategist David Schnautz said. "There's talk that they'll at least leave the door open for QE (quantitative easing)."
Spanish and Italian yields dropped 5 basis points to 3.55 percent and 3.61 percent respectively, back near eight-year lows hit on Wednesday.
A smooth debt auction on Thursday which saw Spain meet a quarter of its 2014 funding target is also clearing the way for Spanish bonds to outperform Italian debt, analysts said.
Rome is scheduled to sell bonds next week. Moody's is expected to at least maintain its stable outlook on Spain's credit worthiness later on Friday after it upgraded Italy's outlook to stable from negative last week.
QE FROM ECB?
Ultra-low euro zone inflation is prompting speculation that the ECB might eventually embark on a government bond buying scheme akin to the Federal Reserve's quantitative easing.
Last week ECB policymaker Ewald Nowotny said he did not believe such a programme would be easy for the ECB due to rules forbidding it from state financing.
Bond and money markets are not pricing in such a move from the ECB but BNP Paribas anticipated action in the second half of the year which they said would aggressively drive down Italian and Spanish yields.
"Actual inflation is very low and is probably set to persist at low levels for some time. The risk is to see inflation expectations declining substantially so the ECB has to keep inflation expectations alive and QE is one of the more effective ways to do this," said BNP Paribas' Patrick Jacq.
He said Spanish and Italian 10-year yields could fall to 2.90 percent by the end of the year. Societe Generale economists, however, saw only a 15 percent probability of QE from the ECB saying it was more likely to provide further cheap long-term loans to the banking system, deliver a small rate cut or stop soaking up money it used to buy crisis-era euro zone bonds to boost excess liquidity.
"From a strategic point of view, we see risks heavily skewed towards the ECB using such tools to buy time and send a dovish signal as they continue to gauge the need for much bigger action," they said in a note. Yields on higher-rated euro zone bonds also fell.
German 10-year yields were down 3 bps at 1.67 percent. Austrian bonds were supported by Fitch's affirmation of the country's triple-A rating with a stable outlook. The agency said the government could handle the cost of restructuring nationalised bank Hypo Alpe Adria.
yahoo.com
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