Lower-rated euro zone bond yields fell to fresh record lows and the common currency slid further on Friday as investors positioned for more monetary stimulus from the European Central Bank.
An upgrade by Standard & Poor's of its credit rating outlook for Portugal added to the positive sentiment and gave a further boost to Lisbon as the country prepares to exit its international bailout this month.
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Investors are betting the ECB will cut interest rates next month, paving the way for potential further steps such as a bond-buying program, after its president Mario Draghi said on Thursday the bank was ready to act in June if updated inflation forecasts merit it.
Yields on Italian, Spanish and Irish 10-year bonds hit record lows of 2.9%, 2.87% and 2.65% respectively while the euro fell another 0.2% from Thursday's U.S. close.
"With the words from Draghi yesterday there is a good chance that peripheral yields continue to move lower in the next month or two," said Stewart Richardson, a partner at macro hedge fund RMG Wealth Management.
"There has been quite an about-turn in thinking in the last 24 hours. We think the chances are much higher now that we get some sort of action from the ECB and this is primarily done to bring down the euro."
Richardson said the yield on Italy's 10-year bond could fall to 2.75%. He has short positions on the euro against currencies such as the Japanese yen and the Norwegian krone.
Portugal's 10-year bonds yielded as little as 3.44%, the lowest level since early 2006, on Friday after S&P lifted the country's credit outlook to stable from negative, far from peaks above 17% hit at the height of the euro zone debt crisis.
Some market participants are becoming cautious after the rapid fall in yields.
"In the European periphery we remain invested in Portuguese and Slovenian government bonds," said Scott Thiel, head of European Global Bonds at Blackrock.
"However, given their significant spread compression to German Bund yields in recent weeks and in light of excessive market expectations for imminent quantitative easing in the euro zone, we have reduced these positions."
SHARES PAUSE AFTER RALLY
Global shares paused for a breather, with the MSCI All-Country World index .MIWD00000PUS down 0.2% after rallying to its highest level since December 2007 on Thursday.
Weak corporate updates from blue chips such as Spanish-listed telecoms operator Telefonica capped European shares, sending the pan-European FTSEurofirst 300 index .FTEU3 down 0.4%.
U.S. futures pointed to a lower start on Wall Street, with S&P June mini-futures down 0.2%.
Markets were also keeping a wary eye on the Ukraine crisis.
Russian President Vladimir praised the Soviet role in defeating fascism on Friday, the anniversary of the World War Two victory over Nazi Germany, in an appeal marked by a poignant ring because Moscow has portrayed leaders in Ukraine as neo-fascists.
Brent crude futures were up about 0.5% to $108.61 a barrel, supported by tension in Ukraine and limited supply from Libya, where a recent deal to reopen oil export terminals seemed unlikely to go ahead.
London nickel prices surged beyond $20,000 per tonne for the first time in more than two years on Friday, rocketing almost 6% at one point as a flurry of supply concerns fuelled heavy buying of the stainless steel material.
Spot gold was flat at $1,289.50 an ounce but still on track for its second straight weekly decline.