German government bonds advanced this week, with 10-year yields dropping the most this year, after European Central Bank President Mario Draghi signaled that further interest-rate cuts remain a possibility.
The yield on Germany’s two-year notes fell the most in two months. Italian bonds declined for a second week as former Premier Silvio Berlusconi, who opposes the current government’s reforms, narrowed front-runner Pier Luigi Bersani’s lead before this month’s elections. Spanish securities dropped for a fourth week as Prime Minister Mariano Rajoy faced calls to resign amid contested corruption allegations.
“Draghi made it clear that they are still accommodative,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “We still have some uncertainty about the events in Italy, and also with what’s going on in Spain. When you have a bit more uncertainty, you see spreads widen again and bunds benefit.”
German 10-year yields fell six basis points, or 0.06 percentage point, to 1.61 percent at 5 p.m. London time yesterday, the biggest decline since the period ended Dec. 28. The rate dropped to 1.58 percent, the least since Jan. 25. The 1.5 percent security due in February 2023 gained 0.575 or 5.75 euros per 1,000-euro ($1,337) face amount, to 98.995.
Two-year note yields slid seven basis points to 0.18 percent, the biggest drop since Dec. 7.
Inflation risks in the euro region are contained and the risk to economic growth in the 17-nation bloc remains to the “downside,” Draghi said in Frankfurt on Feb. 7. He was speaking after ECB policy makers kept the central bank’s main refinancing rate at a record-low 0.75 percent.
Berlusconi, who is appealing a four-year sentence for tax fraud, reduced Bersani’s lead to within the margin of error of an opinion poll before the Feb. 24-25 elections for the first time on Feb. 6, according to a tracking poll by Tecne institute for SkyTG24. Bersani led by 14 percentage points on Jan. 2.
Rajoy’s assurances that allegations he accepted illegal payments are false failed to contain criticism, with opposition leader Alfredo Perez Rubalcaba saying Feb. 3 that he should step down to restore faith in the nation’s political class.
Italian 10-year yields climbed 22 basis points to 4.55 percent this week, while the rate on similar-maturity Spanish bonds increased 16 basis points to 5.36 percent.
A report next week will show the euro-region economy shrank 0.4 percent in the three months through December, the third straight quarter of contraction, according to the median estimate of 28 analysts in a Bloomberg News survey. The data is released on Feb. 14.
Germany is due to sell 5 billion euros of two-year notes on Feb. 13, while the Netherlands and Italy are also scheduled to auction debt next week.
German bonds handed investors a loss of 1.3 percent this year through Feb. 7, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt returned 0.9 percent and Italian securities gained 0.4 percent.