March 6, 2019 / 1:57 PM / 6 months ago

Euro zone yields drop on report ECB discussing new cheap bank loans

LONDON (Reuters) - Investors piled into euro zone government bonds and bank shares edged higher on a report by Bloomberg that the European Central Bank is holding discussions on the design of new ultra-cheap bank loans.

FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo

The European Central Bank is set to slash growth forecasts on Thursday and is likely to provide its strongest signal yet that fresh stimulus is coming in the form of more cheap loans, hoping to stop an unexpected slowdown from becoming a downturn.

The loans known more formally as Targeted Long-Term Refinancing Operations (TLTROs) are expected to boost troubled euro zone lenders, and the euro zone banking index rose to a day’s high, up 0.2 percent, on the news.

“(The) report suggested that not only will there be some announcement on a new round of TLTROS, but they will be kept in place to keep liquidity at current levels,” said Matt Cairns, rates strategist at Rabobank.

“Given what the ECB has to hand, the latest economic projections suggest the downgrade in forecast in terms of the inflation outlook, will likely be moved lower through to 2021. On a 24-month horizon this suggests (the) outlook is quite dovish.”

Talk of additional stimulus boosted euro zone government bonds across the board, but none more so than Italy.

The 10-year Italian government bond dropped eight basis points to a new one-month low of 2.626 percent, while the closely watched spread over Germany, at 253 bps, was close to its tightest level in over a month.

Other euro zone bond yields were down 3-8 bps across the board. Germany’s 10-year government bond yield, the benchmark for the region, was down 4 bps to 0.125 percent, a one-week low.

The euro fell to a two-week low at around $1.12855, before recovering to $1.1326.

German Bund yields had already dropped in early European trade, as some doubts about progress in Britain’s talks to leave the European Union pushed British Gilt yields lower.

Talks between British Prime Minister Theresa May’s top government lawyer and EU negotiators ended with no agreement on Tuesday. Britain wants concessions on Brexit, three weeks before it is due to leave the EU, on March 29.

Reporting by Helen Reid and Virginia Furness, Additional reporting by Abhinav Ramnarayan; Editing by Susan Fenton

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