European bond yields dive again as crisis fears ease

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European stock and bond markets continued to bounce back Thursday, despite initial disappointment that the European Central Bank didn’t provide extensive new help to the battered financial system.

Interest rates on government bonds in Spain, Ireland, Italy and Portugal plunged for a second day, and stock prices and the euro rallied.

The ECB, after holding a regular policy meeting, didn’t publicly commit to ramping-up its purchases of government debt despite the confidence crisis that had driven bond yields sharply higher in recent weeks.

ECB President Jean-Claude Trichet “stated that an ‘overwhelming majority’ of the governing council had backed the ‘ongoing’ purchase of government bonds, but gave no indication that an increase in the pace of government bond purchases had been considered,” said Michael Woolfolk, currency strategist at Bank of New York Mellon.

But the bank’s actions apparently were stronger than its words Thursday: Traders said the ECB jumped into the market to buy bonds after the meeting.

Ireland, which triggered the latest crisis after it was forced to seek a bailout from the European Union, saw yields fall sharply on its bonds. The yield on two-year Irish bonds plummeted to 4.86% from 5.44% on Wednesday and 5.88% on Tuesday.

Italian two-year bond yields slid to 2.47% from 2.71% on Wednesday.

It also helped market sentiment that Spain saw strong demand at its sale of $3.3 billion of three-year notes.

Although the ECB didn’t commit to a massive new bond-purchase program a la the U.S. Federal Reserve’s program, Trichet acknowledged continued “uncertainty” in the financial system. He said the ECB would continue providing unlimited short-term loans to commercial banks through the first quarter of 2011, instead of ending that aid as previously planned.

Stock markets rallied across Europe for a second day, with Spain’s market up 2.8%, Italy up 2.5% and Germany gaining 1.3%.

Still, many analysts said the ECB was playing a dangerous game by failing to send a strong message of support for euro-zone bond markets after their sell-off in November.

“We see no reason to think any risks -- perceived or imagined -- arising from the twin crises of Euroland’s sovereign debt and banking sector are reduced by today’s ECB Council meeting,” Carl Weinberg, economist at High Frequency Economics, wrote in a note to clients.

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-- Tom Petruno