[LONDON] Eurozone borrowing costs lurked around record lows on Thursday, with investors holding tight to their bonds as the European Central Bank readied the final touches on its trillion-euro asset-buying programme.
German two-year yields were minus 0.20 per cent, in line with the ECB's deposit rate as markets were unsure whether the bond-buying scheme would include assets that yield less than the rate at which the ECB effectively funds itself.
Other uncertainties ahead of the ECB's meeting in Cyprus on Thursday include the start date of the programme and the freedom that national central banks have in choosing the bonds they buy. The ECB only plans to cover 20 per cent of the programme, with the rest being the responsibility of each country's central bank.
The main concern is the ECB's ability to meet its monthly target to buy 60 billion euros of assets, mostly government bonds. Banks want the bonds as liquidity buffers as regulators are not asking lenders to set aside cash for government debt as they do for other assets perceived as riskier. Pension funds and insurers need the bonds to match their long-term liabilities. "It will be quite difficult for the ECB to buy bonds," said Emile Cardon, market economist at Rabobank.
German Bund yields were flat at 0.385 per cent, exactly 10 basis points above their record lows. Spanish and Italian 10-year yields fell 2 bps each at 1.29 per cent and 1.38 per cent, respectively - both less than 10 bps above their troughs. "Everybody is aware of the scarcity problem," said Lauri Haelikkae, fixed income strategist at SEB. "The market seems confident that bond prices will continue to rise and yields will fall further." Portuguese bonds are likely to benefit the most from the ECB's quantitative easing programme.
While Portugal's total debt is one of the highest in the bloc, having been bailed out by the International Monetary Fund and the European Union during the debt crisis, its stock of marketable bonds is relatively small. The ECB is likely to scoop up between a fifth and a quarter of the Portuguese debt market.
Portuguese 10-year bond yields were little changed at 1.89 per cent, having traded just below 18 per cent three years ago.
Compounding the feeling that Greece is on the fringes of the euro zone, Greek debt is unlikely to be part of the ECB's programme at least until July. The QE scheme is designed so that the ECB does not own more than a third of a country's debt market, which is already the case in Greece.