Confidence on ECB action pushes government bond yields lower

Euro zone government bond yields fell across the board on Thursday on growing confidence that the European Central Bank will act to support the market in a difficult political environment. Broad-based buying saw high-grade euro zone government bond yields fall 3 to 4 basis points, while Italy’s 10-year yield came off its recent highs. The Italian spread to German equivalents remained near two-year highs hit earlier in the week, however, as political concern remained a major factor. Italy votes on Dec. 4 in a referendum on which Prime Minister Matteo Renzi has staked his job. The ECB said on Thursday that financial stability risk is rising in the euro zone and concern may re-emerge about whether some countries can sustain their debt, potentially raising pressure on the bloc’s weakest sovereigns. Central bank sources told Reuters on Wednesday the ECB is looking for ways to lend more of its pile of government debt to avert a freeze in the 5.5 trillion-euro short-term funding market. Yields spiked at first, but they reversed as the market looked beyond the immediate implications. Strategists said the reports have strengthened confidence the ECB is prepared to alleviate liquidity concerns, and that has given them confidence to buy euro zone government bonds.