The euro area’s higher-yielding government bonds are emerging as a haven from emerging-market turmoil as the prospect of greater stimulus from the European Central Bank underpins demand for the securities.
Portuguese bonds outperformed their counterparts in the region today, with 10-year yields falling to the lowest since December 2009. Irish and Italian yields touched record lows even as Ukraine accused Russia of fueling “terrorism” in its eastern regions. The extra yield, or spread, that investors get for holding Italian 10-year debt instead of similar-maturity bunds shrank for a third day as Germany sold 3.4 billion euros ($4.7 billion) of the benchmark securities.
Less than two years after ECB President Mario Draghi deemed it necessary to pledge unlimited support for the euro-area’s most-indebted countries, investors that rejected those markets through the debt crisis are turning back to them as the ECB considers expanding stimulus. Portugal’s borrowing costs fell to a nine-year low at a bill auction today and Greece, whose debt load triggered the region’s sovereign turmoil, sold bonds last week for the first time since March 2010.
“It’s a sign of confidence when you get the periphery rallying when there is a flight to quality,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment bank unit in London. “Investors do want yields, but nonetheless they will still be selective of what assets to go for. The periphery is one of them they think is safe enough and offers the best risk-reward trade.”
Portugal’s 10-year yield fell 12 basis points, or 0.12 percentage point, to 3.75 percent at 4:23 p.m. London time. That’s from a record of more than 18 percent in January 2012 as the debt crisis provoked concern the euro area would splinter. The 5.65 percent bond maturing in February 2024 gained 1.075, or 10.75 euros per 1,000-euro face amount, to 115.39.
Rates on Irish debt with a similar maturity fell one basis point to 2.85 percent, the least since Bloomberg began collecting the data in 1991.
Draghi’s promise of a backstop is combining with speculation that policy makers will expand monetary stimulus to buoy bonds that investors shunned during the debt crisis. Ewald Nowotny, who also sits on the ECB’s governing council, last week identified June as a potential trigger point for easing policy further and said officials will discuss whether to embark on a debt-purchase program.
“The outlook for the periphery remains bright with the main driver being monetary policy,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “When it comes to what will happen in the next month or two, a lot will depend on how the ECB decides to continue with its monetary policy path and even more with its rhetoric.”
Italy’s 10-year yield was at 3.10 percent and reached 3.09 percent, the lowest since Bloomberg started collecting the data in 1993. The yield spread to bunds narrowed two basis points to 1.61 percentage points. Spain’s 10-year yield was at 3.07 percent, after reaching the lowest since September 2005.
Spain and Italy remain preferred sovereign holdings at Pacific Investment Management Co., Myles Bradshaw, a London-based money manager, wrote in a note on the company’s website. The countries are “systemic credits and their economic challenges, although significant, are less than in the smaller peripheral sovereigns,” he wrote.
Portuguese government bonds have returned 1.3 percent from the end of March through yesterday, while their Irish counterparts earned 1.2 percent, according to Bloomberg World Bond Indexes. Investors who put money in the Stoxx Europe 600 Index in that period lost 0.9 percent including reinvested dividends, according to data compiled by Bloomberg,
“Peripherals remain very robust,” Michael Leister, a senior fixed-income strategist at Commerzbank AG in London, wrote in a note to clients dated today. “Peripherals trade increasingly immune to swings in overall risk sentiment, decoupling from the sharp correction on equity markets over the past sessions.”
Demand for European bonds was boosted today as a report confirmed that the annual inflation rate in the euro area was 0.5 percent last month, the slowest in four years, matching a the median prediction from a Bloomberg survey. That’s a quarter of the ECB’s target, strengthening the prospects of policy makers in Frankfurt adopting more stimulus.
Spreads will continue to tighten as investors flee emerging-market turmoil by buying assets in the euro area, Peter Schaffrik, head of European rates strategy at Royal Bank of Canada in London, wrote in a client note.
“If there are any dangers for the European economies, it appears more likely that the ECB will act and ease policy further,” Schaffrik wrote today. “This essentially prevents European peripheral assets from trading like a proper risky asset and thus trade stronger despite equity, emerging-market currency weakness.”
The yield difference between Spanish and German 10-year narrowed four basis points to 158 basis points, from almost 6.5 percentage points in July 2012.
Germany’s 10-year yield rose one basis point to 1.48 percent. Yesterday’s 1.47 percent close was the least since May.
Germany sold benchmark bunds maturing in February 2024 at an average yield of 1.49 percent today. That’s down from 1.58 percent when the country last sold 10-year debt on March 19.
Portugal allotted 12-month bills at an average yield of 0.597 percent, down from 0.602 percent at a previous auction on March 19 and the lowest rate since Bloomberg began compiling data in March 2005.