German bonds rose with most euro-area government securities after European Central Bank President Mario Draghi said policy makers will consider another round of longer-term loans if required to keep down borrowing costs.
French, Italian and Spanish securities also advanced as Federal Reserve Bank of New York President William C. Dudley said the economy still needs a “very accommodative monetary policy.” The extra yield investors demand for holding Ireland’s 10-year bonds instead of German bunds fell to the least since May 2010 after Moody’s Investors Service raised the outlook on the nation’s debt. Germany’s Angela Merkel searched for a third-term coalition partner after winning yesterday’s elections.
“The central banks are speaking dovishly at the moment and that will be supportive to some degree to the core,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There were no surprises for the market in the election outcome.”
German 10-year bund yields fell three basis points, or 0.03 percentage point, to 1.92 percent at 4:49 p.m. London time after dropping to 1.85 percent on Sept. 19, the lowest since Aug. 30. The 2 percent securities maturing August 2023 gained 0.22, or 2.20 euros per 1,000-euro ($1,349) face amount, to 100.73.
Europe’s banks will repay 7.91 billion euros of three-year loans this week, data released by the ECB on Sept. 20 showed. That’s the highest level of repayments since May.
“While repayment of central bank credit is certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money-market rates,” Draghi said in testimony to the European Parliament in Brussels. The ECB is ready to use tools “including another LTRO, if needed,” referring to the central bank’s longer-term refinancing operations.
The ECB will keep its main interest rate at a record-low 0.5 percent at a policy meeting next week, according to economists in a Bloomberg survey.
France’s 10-year yield dropped three basis points to 2.43 percent, Spain’s slid three basis points to 4.27 percent, while the rate on similar-maturity Italian debt declined two basis points to 4.26 percent.
Dudley said the Fed may wait “a long time” to raise its benchmark rate after breaching its 6.5 percent unemployment threshold.
Volatility on Finnish bonds was the highest in euro-area markets today, followed by those of the Netherlands and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
The Netherlands is scheduled to auction as much as 3 billion euros of three-year notes tomorrow.
Irish bonds swung between gains and losses after Moody’s raised the outlook on the nation’s debt on Sept. 20, citing stability in its access to financial markets. Ireland’s Ba1 grade at Moody’s, one step below investment grade, compares with BBB+ rankings by Standard & Poor’s and Fitch Ratings, according to data compiled by Bloomberg.
“The Moody’s change is only a change in outlook, they still have Ireland at sub-investment grade, but it is a positive development,” said Owen Callan, an analyst at Danske Bank A/S (DANSKE) in Dublin. “It reflects the adjustment that the nation has made and that’s why we’re seeing a bit of a better performance in Irish bonds.”
Ireland’s 10-year bond yield was little changed at 3.89 percent after falling to 3.84 percent, the lowest since July 25. The yield spread over 10-year German bunds touched 187 basis points, the least since May 2010.
Investors often disregard changes in ratings. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.
Merkel’s Christian Democratic bloc took 41.5 percent of the vote in yesterday’s election versus 25.7 percent for the Social Democrats of Peer Steinbrueck, according to results from all 299 districts. That leaves Merkel short of a majority and needing a coalition partner to govern Europe’s biggest economy.
“The election is certainly positive for Spain, Italy and Ireland, because a coalition may be formed that is more positive toward them,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “There is a strong positive sentiment toward Spain, Italy and Ireland and that spreads can narrow more.”
German securities lost 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Irish bonds returned 7.7 percent and Italy’s gained 4.4 percent.