* Southern European bond yields down 5-6 bps
* Recover from post-ECB selling as focus switches to
* Underlying dovish tone of Thursday's ECB meeting
* Risks ahead for Portugal
By Dhara Ranasinghe
LONDON, Dec 9 Southern Europe led a fall in euro
zone borrowing costs on Friday, as the shock of the ECB
continuing its stimulus programme at reduced levels next year
gave way to relief that its bond-buying would remain in place
for some time.
The European Central Bank on Thursday said it would trim its
monthly asset purchases to 60 billion euros from 80 billion
euros from April, triggering a sell-off in euro zone government
bond markets as investors read the move as a tapering of the
However, as the dust settled bond investors took comfort
from the underlying dovish tone from the central bank. The ECB
promised protracted stimulus to support the region's fragile
economic recovery, while the extension of the scheme until the
end of 2017 was three months longer than expected.
"It is clear that even if there is a tapering, and we would
call it that, the overall message from the ECB yesterday was
dovish," said Jan von Gerich, chief strategist at Nordea.
"They have committed to a programme size that lasts for a
longer time period instead of one that keeps the same size for a
Italian and Spanish 10-year government bond yields fell 5
basis points (bps) each in early Friday trade, pulling away from
the previous day's highs.
Portuguese bond yields fell 4 bps to 3.78 percent
, recovering some ground after soaring 24 bps on
Thursday in its biggest one-day jump since the day after Britain
voted to leave the European Union in June.
Still, analysts said Portuguese bonds remained vulnerable
since the ECB's decision not to raise the issuer limit for bond
purchases suggested the central bank would continue to struggle
to find eligible Portuguese debt for the asset purchase scheme.
According to Societe Generale, buying of Portuguese and
Irish bonds has been held at 1 billion euros per month each on
the expectation that this will be enough to last until March.
"Now the same pace of buying will have to last until
December, with little beneficial relaxation of the constraints,"
the bank said in a note.
To make further buys possible, the ECB relaxed some of its
self imposed rules, increasing the pool of eligible assets.
Bonds with maturity between 1 and 2 years will now be
included in the asset buys and the bank will also purchase bonds
yielding less than its -0.4 percent deposit rate, if necessary.
German 2-year bond yield, which fell sharply on the changes
to the scheme, steadied on Friday to trade at minus 0.74 percent
. Germany's 10-year Bund yields were about 3 bps
lower at 0.37 percent.
Reuters new Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Dhara Ranasinghe)