EURO GOVT-Peripheral risk premiums fall on ECB bond-buying

December 3, 2010

By William James

LONDON, Dec 3 (Reuters) – Risk premiums on government bonds issued by euro zone periphery states fell on Friday, with further bond buying by the European Central Bank reassuring investors.

Core German debt yields rose ahead of the release of U.S. payrolls data later in the session, meaning peripheral yield spreads over the euro zone benchmark narrowed. The cost of insuring peripheral debt against default also fell.

Traders said the ECB bought Irish and Portuguese bonds on Friday, though volumes were thin.

“It’s not massive, but we’ve seen them buying 10-year Portugal andIreland,” a trader said.

Purchases on Thursday helped drive yields on peripheral debt lower. Buying was more active than usual, traders said, during ECB President Jean-Claude Trichet’s news conference on Thursday at which he made no commitment to extend the bond-purchase programme, launched in May to help calm the debt crisis.

The Portuguese PT10YT=TWEB bond yield spread versus German debt tightened to 43 basis points to 313 bps, its narrowest since late August and more than 150 basis points below the euro lifetime high of 480 bps seen earlier this month.

The equivalent Irish IE10YT=TWEB spread tightened by 25 bps to 583 bps.

While the ECB was not seen buying Spanish or Italian debt, spreads narrowed as the ECB’s presence boosted confidence.

The Spanish 10-year yield ES10YT=TWEB fell to its lowest in about 10 days.

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