Spanish government bonds fell as investors cooled on euro-area debt in bets that the European Central Bank won’t add stimulus tomorrow. Its June meeting sparked the biggest monthly gains since January.
“The fireworks were last month and you can’t expect the ECB to do that every” meeting, said Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion. “The market prices look pretty ambitious and my personal fear is that we could see a correction in fixed-income markets, and rates may move a little a bit higher. But this will only happen if inflation goes up again.”
Euro-region bonds earned 1.1 percent last month, the most since jumping 2.2 percent in January, after the ECB unveiled stimulus measures on June 5 designed to boost the currency bloc’s economy. That stoked a rally from Germany to Greece with the average yield to maturity on euro-area government bonds, as measured by Bank of America Merrill Lynch’s Euro Government Index, falling to an all-time low of 1.3039 percent on June 26.
Spanish 10-year yields jumped nine basis points, or 0.09 percentage point, the biggest increase since May 15, to 2.73 percent at 4:21 p.m. London time. The yield has risen 16 basis points since falling to a record 2.542 percent on June 10. The 3.8 percent bond due in April 2024 declined 0.85, or 8.50 euros per 1,000-euro ($1,365) face amount, to 109.08.
Rates on similar-maturity Italian bonds increased eight basis points to 2.91 percent, after dropping to an all-time low of 2.694 percent on June 9.
ECB officials meeting in Frankfurt will keep the main refinancing rate at a record-low 0.15 percent tomorrow, according to all 54 economists in a Bloomberg News survey.
“The absolute level of yield is extremely low, and historically low for Spain, Italy and Portugal, so it’s hard to see them going that much further,” said Chris Iggo, London-based chief investment officer for fixed income at AXA Investment Managers, which manages 380 billion euros in fixed-income assets globally. “I don’t think they’ll move the other way either, as we know the ECB won’t be raising interest rates for a long time.”
Demand for the euro region’s bonds surged after ECB President Mario Draghi vowed in July 2012 to safeguard the common currency. That pledge was reinforced this year as inflation at about a quarter of the central bank’s target and near-record unemployment prompted more policy easing, including charging banks to park cash overnight with the central bank.
Frankfurt Trust still has a long position on the region’s so-called periphery because of the extra yield the bonds offer relative to German bunds, Kind said. He also preferred shorter-dated notes because “the ECB is not going to raise rates anytime soon,” he said. Securities with shorter maturities tend to be more sensitive to the outlook on central bank monetary policy, while longer-dated debt tends to be influenced more by inflation prospects. A long position is a bet an asset’s price will increase.
Most of the recovery trade in euro-area peripheral debt is over, Stephen Cohen, BlackRock Inc.’s chief investment strategist for international fixed income, said at a briefing in London yesterday. BlackRock is world’s biggest money manager with more than $4 trillion of assets under management.
Ireland is seeking to cut the size of a 10.2 billion-euro note due to mature in April 2016 by offering investors a chance to sell back their notes or switch into longer-maturity bonds due in 2023, while Portugal was said to be selling through banks $4.5 billion of its first dollar bond since 2010.
Portugal’s dollar-denominated 10-year debt was priced to yield 260 basis points more than similar-maturity Treasuries, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it.
Benchmark Treasury 10-year yields increased four basis points to 2.61 percent.
Ireland’s National Treasury Management Agency offered to buy back the 4.6 percent notes due April 2016 at a price to yield 0.165 percent, it said in a statement. Holders of the securities may also switch into a 3.9 percent March 2023 bond, which the NTMA is selling at 2.095 percent, it said.
Portugal, which emerged from its financial bailout this year, may be taking on the dollar debt now to avoid higher yields in the second half of the year, said Alessandro Giansanti, senior rates strategist at ING Groep NV in Amsterdam. Ireland exited an international bailout plan in December.
Yields on Ireland’s 3.4 percent bonds due March 2024 climbed four basis points to 2.40 percent, while those on Portuguese 10-year debt rose three basis points to 3.63 percent.
Euro-area securities returned 7.3 percent this year through yesterday, Bloomberg World Bond Indexes show. That’s the most among 34 sovereign indexes tracked by Bloomberg. Greek and Portuguese bonds led the gains with earnings of 30 percent and 16 percent, while Italian securities gained 9.2 percent, the gauges show.