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EURO GOVT-ECB cash drives Italian 2-year yields to 15-mth lows
March 1, 2012 / 4:51 PM / 6 years ago

EURO GOVT-ECB cash drives Italian 2-year yields to 15-mth lows

 * Italian yields break below key psychological levels
 * ECB cash to support peripheral debt near-term
 * Spain finds good demand at 4.5 bln euro bond sale
 * Bund futures back away from record highs
 By Marius Zaharia and Alessandra  Prentice	
 LONDON, March 1 (Reuters) - Italian two-year bond
yields slipped below 2 percent to their lowest level in 15
months on Thursday, as a flood of cheap ECB funding boosted
appetite for peripheral debt and also spurred strong demand at a
Spanish debt sale.	
 An additional half trillion euros of three-year European
Central Bank funds was added to the financial system on
Wednesday and is expected to continue to support a rally in
lower-rated euro zone debt in the near term. 	
 Italy's debt outperformed as its domestic banks were among
the heaviest bidders for ECB cash, taking 139 billion euros of
the total. Two-year yields fell to 1.73 percent,
their lowest since October 2010, while 10-year yields
 dropped 22 basis points to 4.98 percent.	
 "Confidence is building," said David Keeble, global head of
fixed income strategy at Credit Agricole. "We should see a
further tightening of the spreads. Surely we've seen most of it
and it's going to be a slower grinding now but I think we're on
a good trajectory."	
 The massive take-up of ECB funds by Italian banks has pushed
the short end of the Italian yield curve below the Spanish one.
One trader called the move "a distortion" and analysts say
Spanish bonds should yield less than Italian bonds based on
economic fundamentals. 	
 Spain has been under pressure after recent data showed it
overshot its budget target last year and the rally in Spanish
bonds also lagged because the country frontloaded its debt
issuance, having now issued almost 40 percent of its 2012 goal.	
 A 4.5 billion euro sale of shorter-dated Spanish bonds drew
healthy demand on Thursday. 	
 While the rally could continue for another couple of days or
weeks, analysts say sentiment could quickly turn around due to
the myriad of problems in the euro zone yet to be addressed.	
 Newedge Strategy's market economist Annalisa Piazza said 
she ruled out that "the extent of the tightening in peripheral
spreads over German Bunds would be massive," due to risks of a
deep recession in southern euro zone states.	
 "Some accounts are getting in some trades just waiting for
the curve to flatten. They are expecting some profit taking on
the 2-year and 3-year paper, which is looking super expensive," 	
the trader said.	
 Greece, described by Credit Agricole's Keeble as "the
elephant in the room", will remain in focus.	
 Even if the Greek debt swap that is currently under way is
successful, Greece's economy will still look worse than
Portugal, seen by many as the next country in line to
restructure its debt. The new Greek bonds are thus likely to
price in a high risk of another debt restructuring.
 Greece has not yet triggered payment on controversial
default insurance contracts, but Athens' huge debt restructuring
is still expected to end up causing a credit default swap
 German Bund futures were last 61 ticks lower at
139.28, having fallen from all-time highs of 140.28 hit on
Wednesday, when they gained in tandem with peripheral bonds.	
 "Liquidity lifts all boats," Keeble said. "But when the U.S.
Treasury market is under so much pressure and the (U.S.) growth
numbers have been coming in strong, you can't offset that
entirely with extra ECB cash."	
 U.S. jobless claims fell by 2,000 to 351,000 in the latest
week, holding near four-year lows, but the pace of growth in
U.S. manufacturing unexpectedly slowed in February.
 (Editing by Susan Fenton)	

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