Mario Draghi has once again proved himself to be the bond market’s best friend.
A jump in government securities across the euro area sent yields to record lows today, inspired by a fresh package of stimulus measures from the European Central Bank. Spain’s 10-year rate fell the most since June 2013 as sovereign bonds from the euro area’s most-indebted nations extended a surge during ECB President Draghi’s 2 1/2-year tenure that has hauled down borrowing costs from the highest in the currency bloc’s history.
“We are happy because in our view the ECB delivered,” said Nicola Marinelli, who helps oversee about $190 million at Sturgeon Capital Ltd. in London. “This year a lot of the performance has come from peripheral investments, corporate and government bonds,” he said, describing Draghi as a “rock-star central banker.”
The ECB’s plan, which includes lower interest rates and funding for bank loans, is adding fuel to the rally in European bonds, banishing memories of the sovereign debt crisis that threatened to blow apart the currency union as recently as 2012. As well as enriching bondholders, the rally in government bonds may facilitate nations’ efforts to control their debt loads and boost the flow of cash to businesses and households.
Yields on Belgian, French, Irish, Italian (GBTPGR10) and Spanish debt fell to all-time lows today and Germany’s five-year rates dropped to the least since May 2013. Greece and Portugal led euro-region securities to a 6.1 percent return this year through yesterday, according to Bloomberg World Bond Indexes. (BEUR)
The yield on Spanish 10-year securities, which was more than 600 basis points above the rate on similar-maturity U.K. bonds in 2012, declined to below gilt yields today. That’s another marker of the debt-market recovery, which has already seen Ireland, Portugal and Greece sell bonds and high-yield company credit risk plunge.
ECB officials yesterday cut the main refinancing rate to a record 0.15 percent and moved the deposit rate below zero for the first time, meaning banks will be charged to park cash with the central bank. Draghi also said the ECB will introduce targeted offerings of liquidity to banks to encourage them to lend, and that officials will also start work on purchases of asset-backed securities.
“They’ve taken an important set of steps forward in trying to keep expectations of interest rates and policy rates lower for longer,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s corporate and investment banking unit in London. “What they’re talking about is trying to reintegrate the European credit market and that’s very good for the periphery.”
Spain’s 10-year yields fell 19 basis points, or 0.19 percentage point, to 2.63 percent at 4:24 p.m. London time, and touched 2.612 percent, the least since Bloomberg began compiling the data in 1993. The 3.8 percent bond due in April 2024 rose 1.725, or 17.25 euros per 1,000-euro ($1,367) face amount, to 110.04.
The 10-year rate touched a euro-era record 7.75 percent on July 25, 2012, the day before Draghi triggered a rally by pledging to do whatever was necessary to hold the euro area together with the words “believe me, it will be enough.”
“With Spanish yields at new record lows, the ECB’s negative deposit rate is already driving massive money displacement from money markets into peripheral bonds,” Lena Komileva, chief economist at G Plus Economics Ltd. in London, wrote in an e-mailed note today. “How the ECB’s measures will ultimately work will depend on the cost of banks’ capital, rather than the scale of additional cheap ECB liquidity pumped into the markets.”
The rate on 10-year Italian debt tumbled as much as 21 basis points to 2.723 percent, an all-time low, and that on similar-maturity French bonds fell to 1.656 percent, the least since Bloomberg began compiling the data in 1990. Spanish and Italian two- and five-year rates also touched records.
The average yield to maturity on government bonds from Greece, Ireland, Italy, Portugal and Spain fell to a record 2.12 percent yesterday, according to a Bank of America Merrill Lynch Index. That’s down from a euro-era high of 9.55 percent in November 2011, the month Draghi assumed his position.
The cost of insuring against losses on high-yield company debt in Europe fell today, with the Markit iTraxx Crossover index of 60 mostly junk-rated borrowers dropping eight basis points to 229 basis points, the lowest since June 2007.
The ECB yesterday created a targeted 400 billion-euro loan program to incentivize banks to lend themselves and extended the practice of granting them as much cheap cash as they want until the end of 2016. Investors should buy short-dated periphery notes to benefit from the policy, Michael Leister, a senior fixed-income strategist at Commerzbank AG in London, wrote in an e-mail today.
The yield spread between Italian five- and 10-year debt jumped five basis points to 139 basis points today, as rates on the shorter-dated securities declined more than those on the longer-maturity debt.
French five-year yields dropped to a record 0.509 percent, Irish 10-year rates dropped to as low as 2.424 percent and the yield on similar-maturity Belgian bonds touched 1.771 percent.
Germany’s five-year rate dropped to as low as 0.352 percent, the least since May 17, 2013. The nation’s 10-year yield fell five basis points to 1.35 percent. The yield difference, or spread, between benchmark bunds and similar-maturity Spanish debt shrank 13 basis points to 129 basis points, after narrowing to 127 basis points, the tightest since May 2010.
The spread may narrow toward 75 basis points, Credit Agricole’s Jellinek said.
Greek 10-year bond yields dropped 45 basis points to 5.78 percent, the biggest decline since since May 2013. The rate touched 5.77 percent, the lowest in more than four years.
Portugal plans to sell as much as 750 million euros of securities on June 11 in the nation’s second auction since exiting its three-year bailout program. The rate on Portuguese 10-year bonds dropped 13 basis points to 3.51 percent.