[LONDON] Investors grabbed eurozone sovereign debt on Monday, sending implied borrowing costs for many countries to record lows, in anticipation of the European Central Bank announcing a sovereign bond-buying scheme this week.
ECB president Mario Draghi met German Chancellor Merkel last week and, according to German newspaper reports, outlined detailed plans for a quantitative easing programme.
While governing council member Ewald Nowotny became the latest policymaker to stress the limits of ECB easing on Monday, 70 per cent of economists polled by Reuters last week expected QE to be announced after Thursday's meeting.
Yields on Italian and Spanish bonds fell to record lows, with Germany's matching lows hit on Friday. Even an early sell-off in Greek yields, after Fitch put a negative outlook on its rating, proved short-lived.
"The ECB is under significant pressure to deliver a large and credible QE package this week - not easy given ongoing resistance from the hawks on the Governing Council, but we think that the ECB will overall deliver," said UBS economist Reinhard Cluse.
With most market participants now convinced the ECB will need to launch QE to counter deflation, attention has turned to the mechanics.
The ECB may leave the burden of risk for purchases with national central banks, and set limits on how much debt can be bought from each country, German newspapers said.
Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers, said the ECB may even exclude junk-rated Greek debt on concerns that political developments there could lead to a further default.
But others said any exclusion of Greece would be against the founding principles of the currency union.
Fitch on Friday revised the outlook on its 'B' rating to negative from stable, saying that national elections this weekend could torpedo economic recovery.
Financial markets are bracing for a win by the anti-bailout Syriza party, which promises to end austerity policies, reverse some reforms, stop privatisation and renegotiate debt. "A full-blown crisis after the elections is a very major tail risk for Greece, and investors have started to speculate about that now," said DZ Bank strategist Christian Lenk.
Polls on Friday showed the Syriza party solidifying its lead over the ruling conservatives before the vote on Jan. 25.
Greek 10-year yields initially rose 9 basis points to a day's high 9.50 per cent before swinging back. By 1030 GMT, yields had fallen to 9.31 per cent with attention firmly on Thursday's ECB meeting.
Italian and Spanish 10-year yields were both down, having earlier hit lows of 1.62 and 1.47 per cent , respectively. German equivalents were 3 bps lower at 0.38 per cent, with all other eurozone yields also down on the day.