UPDATE 3-European peripheral bond yields fall after ECB commits to more stimulus

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds chart on euro)

AMSTERDAM/LONDON, Oct 29 (Reuters) – Yields on southern European government bonds fell on Thursday after the European Central Bank clearly signalled it will provide more stimulus at its next meeting to contain the growing fallout from a second wave of coronavirus infections.

Louis Harreau, euro zone economist and ECB strategist at Credit Agricole CIB, said it was “probably the first time in its history that the ECB is pre-committing for more accommodation with such clarity.”

“It is already clear that the ECB will increase the purchase programmes,” Harreau said.

The central bank’s Governing Council left policy unchanged this time around but committed to take more action as new national lockdown measures make a double-dip recession increasingly likely for the euro zone economy.

“We agreed, all of us, that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting,” ECB President Christine Lagarde told a news conference.

The likelihood of upcoming stimulus boosted southern European bonds – which stand to benefit the most from additional stimulus – extending their rally after a hefty sell-off on Wednesday, when new lockdown announcements in France and Germany hit risk assets.

Portuguese and Spanish 10-year government bond yields fell to 10-day lows at 0.12% and 0.10% respectively.

Italian yields were set for their biggest daily fall since mid-September, last down 7 basis points on the day to 0.70% .

RISK PREMIUM

The spread between Italian and German 10-year bond yields – effectively the risk premium on Italian debt – tightened to 133 basis points after hitting its widest in a month in earlier trade at around 140 basis points.

Greek bonds, rated junk and only eligible for ECB emergency bond buying, retraced earlier losses, with the 10-year yield last up 1 bps at 0.97% after rising to 1.10%, their highest in more than a month.

Euro zone equities and banking stocks also recovered sharply after Lagarde’s remarks on policy recalibration. The Euro STOXX bank index was last up 0.6%, having fallen as much as 2.3% earlier in the session.

The euro also fell and was trading last down 0.8% at $1.1658, its lowest since end of September.

Piet Christiansen, chief analyst at Danske Bank in Copenhagen, said he expected more than one measure at the next meeting.

Lagarde said the recalibration will touch on all of the bank’s instruments.

Lyn Graham-Taylor, fixed-income strategist at Rabobank, said in addition to expanding the Pandemic Emergency Purchase Programme (PEPP), the recalibration could include an extension of the terms of the ECB’s cheap Targeted Longer-Term Refinancing Operations (TLTRO) loans, or a deposit rate cut.

Money markets are pricing in a roughly 30% chance of a rate cut at the ECB’s December meeting, unchanged from prior to the meeting on Thursday.

($1 = 0.8461 euros)

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