Spanish and Italian bonds led advances in the euro area’s higher-yielding debt as the European Central Bank took an unprecedented step of signaling interest rates will be kept low for an extended period.
German notes also climbed, pushing two-year yields down to the lowest in almost a month, as ECB President Mario Draghi said the central bank has no plans to end its accommodative monetary policy until economic recovery is assured. He was speaking at a press conference in Frankfurt after the institution kept its key interest rate at a record-low 0.5 percent. Portugal’s 10-year (GDBR10) yields dropped from near a seven-month high.
“Draghi surprised the market,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The key sentence that rates would remain low for an extended period of time has to some extent revived rate-cut expectations, and at the very least, wiped out fears of a removal of stimulus. Markets are rewarding that with price gains.”
Spain’s 10-year yields dropped 12 basis points, or 0.12 percentage point, to 4.65 percent at 4:38 p.m. London time. The 4.4 percent bond maturing in October 2023 climbed 0.92, or 9.20 euros per 1,000-euro ($1,293) face amount, to 97.99. The rate on similar-maturity Italian securities decreased 11 basis points to 4.40 percent.
Euribor futures contracts climbed as investors added to bets on lower inter-bank borrowing costs. The implied yield on the contract expiring in June 2014 fell eight basis points to 0.4 percent.
“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time,” Draghi said. “The risks for the euro area continue to be on the downside. Our monetary policy stance will remain accommodative for as long as necessary.”
Draghi’s pledge to keep ECB policy accommodative contrasts with recent commentary from the Federal Reserve. Sovereign bond yields around the world jumped last month when Fed Chairman Ben S. Bernanke said on June 19 the U.S. policy makers may start to slow the pace of bond buying this year and end it in mid-2014 if the economy meets the central bank’s projections.
That helped to push U.S. 10-year Treasury yields to the most since August 2011 and their German equivalents to the highest level since April 2012.
“Draghi did the right thing today by providing forward guidance that rates will stay low for an extended period,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S (DANSKE) in Copenhagen. “That will support government bonds in the euro region, especially peripheral debt.”
Germany’s two-year note yield slid five basis points to 0.12 percent after reaching 0.08 percent, the lowest since June 6. The 10-year yield fell one basis point to 1.65 percent.
“It’s a very pragmatic policy the ECB are following and they realize that, once one of the major central banks start to openly discuss the removal of stimulus, then they have to manage expectations very carefully,” said Bayerische Landesbank’s Daheim.
Volatility on Portuguese bonds was the highest among euro-area markets today, followed by those of Italy and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
Portugal’s 10-year bonds climbed as coalition partners sought to heal a rift that threatened to bring down the government. The 10-year yield fell 19 basis points to 7.27 percent after rising to 8.11 percent yesterday, the highest since Nov. 21, on concern the resignation of two ministers will derail attempts to implement austerity measures.
The nation’s two-year notes extended a decline, pushing the yield up as much as 75 basis points to 5.79 percent, the highest level since Nov. 19.
Spanish securities returned 5.3 percent this year through yesterday, according to the Bloomberg World Bond Indexes. German bonds declined 1.3 percent and Portuguese securities lost 1.5 percent.