Irish, Portuguese bond yields hit record lows as ECB buying nears

(Recasts with Irish, Portuguese bond moves, writes through)

By Emelia Sithole-Matarise

LONDON, Feb 25 (Reuters) - Irish and Portuguese bond yields hit all-time lows on Wednesday as fears about a Greek exit from the euro zone receded, leaving investors to refocus on the start in coming weeks of European Central Bank bond purchases.

Irish 10-year yields were a whisker away from hitting 1 percent for the first time and on the cusp of joining top-rated euro zone bonds yielding less than 1 percent. The move cements Ireland's recovery from the debt crisis and its return to capital markets after exiting an international bailout at the end of 2013.

Peripheral euro zone bond yields have resumed their fall after Greece's new leftist government clinched a four-month extension of its financial rescue, easing fears about the country's potential exit from the 19-nation currency bloc.

Portuguese 10-year yields fell 5 basis points to a record low of 2.07 percent while Italian equivalents were also lower at 1.45 percent, not far from their all-time trough.

"With the Greek drama having found a temporary equilibrium with the approval of the Eurogroup, the market is moving on and preparing for QE," said Matteo Regesta, a strategist at Citi.

"Therefore you go where the yield is with the clear thought that with this huge buyer these extremely high valuations will be maintained and supported."

The firm market backdrop and investors' hunt for higher returns than the miniscule yields offered by top-rated bonds saw robust demand for a Portuguese auction of almost 1.5 billion euros in 10-year bonds on Wednesday at a fresh record low yield.

Portuguese debt may benefit more than its peers in the euro zone from the ECB bond buying and as investors cheer its continuing reforms. Like Ireland, it has been held up by many officials in the euro zone as a country that has stuck to its bailout terms and is now reaping the benefits of austerity and reforms.

Spain was also seeing robust demand for 15-year bonds it is selling via a syndicate of banks as investors are lured into longer-dated maturities offering higher yields.

STRONG DEBT SALES

Pending ECB purchases were also propping up demand for benchmark German bonds despite vanishing yields. Germany sold 3.3 billion euros of five-year debt at a record low yield of -0.08 percent on Wednesday, meaning investors have to pay the federal government to buy the bonds.

German 10-year yields, the yardstick for euro zone borrowing costs were 2 bps lower at 0.35 percent, helped too after U.S. Federal Reserve chair Janet Yellen kept the door open for a later than mid-year rate hike.

Greek bond yields, however, edged up ass national euro zone parliaments prepare to vote in coming days on the extension of the financial rescue approved by the bloc's finance ministers, though the ECB and IMF criticised Athens for lack of clarity on its reform pledges.

A group of hardliners among Germany's ruling conservatives have urged lawmakers to take a tough stance on the loan extension, the Frankfurter Allgemeine Zeitung reported on Wednesday, but analysts expect it to be approved.

(Editing by Toby Chopra)