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Bonds stabilizing

A possible further ECB stimulus created a barrier against a steeper rise in periphery yields, which stabilized a sharp sell-off, caused by the Greek yields crisis.

Nevertheless, markets remained nervous as global growth worries persisted. Deflation hit five euro zone countries in September, including Italy and Spain, while a string of surprisingly weak German economic data and a deteriorating rating outlook for France has had investors wondering where growth will come from.

Greek yields remained on track for their biggest weekly rise since 2012, while Portuguese bonds were on course for their worst week since 2013. Spanish and Italian bonds also sold off heavily this week.

Traders said the rise in yields was accelerated by a crisis-like liquidity trap in which a rapid accumulation of selling orders met no buying interest.

But a readjustment of 25 or more basis points was enough to lure back investors betting on the ECB eventually launching a large scale bond buying programme, known as quantitative easing (QE), to give the economy a shot in the arm.

In any case a 2012-like sell-off was unlikely to be sustained for too long as the ECB's promise that year to buy government bonds if a country gets into trouble in getting access to markets was still in place. That promise took the form of a programme called Outright Monetary Transactions (OMT).

"The adjustment yesterday was pretty marked and I don't think there's a case for that to continue in the same way," said Chris Scicluna, head of economic research at Daiwa Capital Markets. "After all, the OMT still exists and there is still a possibility of QE at some point."

Spanish, Italian and Portuguese 10-year yields were 4-10 bps lower on the day at 2.18%, 2.52%, and 3.41%, respectively. Their falls from the intra-day highs were deeper than 10 bps.

ECB policymakers speaking on Friday did not show any urge to ease monetary policy further, but kept their options open.

Governing Council member Ewald Nowotny said the central bank had room for more action, but the euro zone economy did not need emergency measures.

"The main reason you buy periphery is that you believe that at some point ECB President Mario Draghi will do QE," said Michel Danechi, portfolio manager at EI Sturdza strategic emerging Europe fund. "The weakening in Germany and elsewhere must have increased the chances of QE."