(Updates prices, move in Italian yields)
By Abhinav Ramnarayan
LONDON Dec 16 Two-year German government bond
yields hit further record lows on Friday as banks loaded up on
bonds likely to become scarcer after recent tweaks to the
European Central Bank's asset purchase programme.
On a day when most high-rated euro zone government bond
yields were down 3 to 4 basis points, the yield on the German
two-year government bond, the Schatz, hit minus 0.80 percent for
the first time.
The ECB said last week it would reconfigure its bond-buying
scheme at the start of 2017, introducing changes that suggested
it would focus purchases on short-dated government bonds.
It expanded the eligibility of the scheme to include bonds
with maturities of one year and above and bonds yielding less
than the deposit rate.
Investors were already struggling with a shortage of
short-dated bonds - used as collateral to borrow in money
markets - before the changes, and this is expected to worsen.
"The ECB has come up with measures to reduce scarcity, but
it's not going to make a sea change," said ING strategist Martin
van Vliet, referring to the ECB's move to make a securities
lending programme easier to access.
On Thursday, banks rushed to make use of this programme to
borrow German government bonds from the Bundesbank, market
sources told Reuters.
"The fee is still very punitive for securities lending.
Going into next year I would expect the Schatz yield to go up a
bit - but it will remain at very low levels," van Vliet added.
Mizuho strategist Peter Chatwell said that this collateral
scarcity could make the two-year borrowing costs of
stronger-rated euro zone countries converge as time wears on.
"This is most likely to be true for France, as its repo rate is
the most likely to hit minus 0.70 percent in the coming months."
French two-year bonds yielded minus 0.65 percent, down 2 bps
on the day. The 15 bps spread over German
equivalents is narrower than the 10-year spread, which stood at
Euro zone bond yields fell across the curve on Friday, with
the long end in particular in demand, most likely a spillover
from moves in Japanese government bonds, according to Chatwell.
The yield on Germany's 30-year bond led the
activity, dropping as much as 10 bps to a one-week low of 1.03
percent. Yields on other higher-rated 30-year euro zone bonds
also dropped as much as 8 bps.
"There's no real driver in Europe for these moves, but it is
likely a spillover from the Japanese government bond curve, with
the Japanese central bank stepping up the intensity of its long
end buying," said Chatwell.
The yield on Japan's 30-year government bonds
has fallen 14 bps over the past three sessions to 0.68 percent.
Euro zone bonds tend to move in sympathy with big moves in
other large government bond markets in Japan and the United
States because many investors have exposure to all three and
switch between them.
Italian bond yields rose, pulling back from
one-month lows hit earlier this week around 1.77 percent after
UniCredit announced the country's biggest ever share sale and
new Prime Minister Paolo Gentiloni presented an almost unchanged
For Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Abhinav Ramnarayan; Editing by Mark Heinrich/Ruth