Eurozone bond yields fall on QE launch but Greece jitters resurface

[LONDON] Most eurozone government bond yields fell on the first day of the European Central Bank's sovereign debt purchase programme, with only fears about Greece's funding spoiling Monday's launch party.

German 10-year bond yields - the bloc's benchmark - fell 4 basis points to 0.36 per cent, clawing back ground lost on Friday after strong US jobs data raised the chance of an interest rate hike in the world's biggest economy.

Other eurozone equivalents opened around 2-5 bps lower, except for Greek 10-year paper which rose on concerns the European Union might reject reform proposals vital to unlocking new bailout cash for Athens.

"Markets will open a new chapter today," said Commerzbank strategist David Schnautz.

Eurozone finance ministers are meeting on Monday in Brussels to discuss a letter of pledged reforms sent by Athens last week.

The chair of the meeting, Jeroen Dijsselbloem, said on Sunday that the Greek proposal was not enough to unlock further aid. Time is pressing because Greece is expected to run out of cash later this month.

Should Brussels ultimately reject Greece's proposals, the country could call a referendum or have early elections, its finance minister said on Sunday.

Greek 10-year yields opened 8 bps higher at 9.58 per cent .

This nervousness also saw lower-rated debt in the eurozone, which is expected to have the most potential to perform under quantitative easing, slightly lag the rally seen in German and other top-rated bonds.

Italian and Spanish 10-year yields dipped 2 bps to 1.30 and 1.22 per cent, respectively.

After months of speculation, investor attention is now fixed on how the ECB's programme will work in practice.

While analysts expect a smooth start for the programme as overseas holders of eurozone debt swap bonds for higher-yielding US or emerging markets debt, questions remain over how willing domestic investors will be to sell.

In Italy, for instance, 70 per cent of bonds are held domestically, according to RBS research.

"Domestic investors are not likely (to sell) ... either because of tax treatment, preferred habitat and lack of alternatives - unless new regulatory measures incentivise banks to liquidate (large) holdings," RBS analysts wrote.

With ECB chief Mario Draghi dismissing concerns last week that the ECB may struggle to implement its 60 million euros a month QE programme, many think the rally in eurozone government bonds may have much further to go.

REUTERS