Euro zone yields lower on expectations of more central banks measures

MILAN: Euro zone government bond yields were edging down on Friday as expectations of more policy easing by central banks coupled with persistent concerns about economic recovery underpinned prices.

The European Central Bank (ECB) may need to introduce fresh stimulus measures to support an uneven and uncertain recovery in the euro zone and bring inflation closer to its 2% target, ECB policymaker Pablo Hernandez de Cos said on Friday.

Thursday's Bank of England (BoE) statement about a possible cut in interest rates below zero, which triggered a rally in gilts, supported euro zone bonds.

Safe-haven German 10-year bond yields were down 1.7 basis points at -0.507%.

Italian 10-year yields were down 1.1 basis point at 0.944% after hitting a new six-month low at 0.942%.

BoE's engagement "with bank regulators on negative rates is fuelling rate cut speculation, ensuring that Bund dips continue to be bought and allowing 10-year yields to push through the -0.50% level," a Commerzbank research note said.

"Long-end yields should struggle to push lower from here and we close our tactical longs," it said adding it remained overweight on Italy.

But analysts said the 10-year Bund yield was unlikely to hold below -0.5%, the European Central Bank's policy rate.

Focus is on next week's auction for the European Central Bank's TLTRO programme, which offers cheap loans to banks.

The ECB's announcement that it would let euro zone banks exclude some of their exposure from the calculation of a key capital requirement until June 2021 is expected to shore up demand.

"Although the allotment will be lower than in June, it will nevertheless bring additional liquidity to the system," a Unicredit research note said, referring to the auction.

Focus remained on central bank comments after dovish ECB speakers nuanced the bank's sanguine policy message last week that took markets by surprise given the bloc's negative inflation reading in August and the appreciation of the euro.

Investors were shrugging off regional elections and a constitutional referendum in Italy on September 20-21, since they do not expect risks of political instability.

"The upcoming elections look inconsequential for BTPs. For 10yr BTP-Bunds spread, we now believe an average of 150bp can hold for much of 2021," a Citi research note said.

Italy will hold on Friday an exchange transaction, reopening BTP 1.65% March 2032 for a maximum amount of 2 billion euros and repurchasing BTP 3.75% March 2021, BTP 3.75% August 2021, CTZ November 2021 and CCTeu December 2022.