Spain’s five-year note yields fell below their American equivalents for the first time since 2007 this week as euro-area bonds surged on bets the European Central Bank will add more stimulus to the economy.
Yields across the region’s peripheral countries fell to records after ECB President Mario Draghi said on April 3 policy makers were considering measures including bond purchases, or quantitative easing. The yield premium investors demand to hold Italy’s securities instead of Germany’s slid yesterday the most since January. Greek 10-year yields dropped to the least in four years as officials said the nation plans to follow Ireland and Portugal in returning to capital markets.
“There’s been a massive spread compression regardless of fundamentals driven by QE expectations,” Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London, said yesterday. “Being long liquid peripheral bonds versus bunds looks a win-win strategy.” A long position is a bet a bond’s price will rise.
Spain’s five-year yield fell 14 basis points, or 0.14 percentage point, this week to 1.72 percent at 5 p.m. London time yesterday after touching 1.69 percent, the lowest since Bloomberg started tracking the data. The 2.75 percent security due April 2019 climbed 0.655, or 6.55 euros per 1,000-euro ($1,371) face amount, to 104.955.
Spain’s two-year yield and Italy’s five- and 10-year rates slid to the lowest since Bloomberg began tracking the data in 1993. The rate spread between 10-year Italian securities and their German counterparts tumbled to the narrowest since June 2011. Ireland’s 10-year yields declined to the least since 1991 and Portugal’s tumbled to a 2009 low.
“We talked about lower interest rates, a lower deposit facility rate, we talked about QE,” Draghi said at a press conference in Frankfurt after the ECB’s monthly policy meeting. The Governing Council is “unanimous in its commitment to also using unconventional instruments within its mandate,” he said.
Bonds from Europe’s most indebted nations are rallying as investors returned to markets they shunned during the region’s debt crisis amid signs of economic recovery. Now the rally is morphing into a bet the ECB will either print cash to buy bonds or allow inflation, which slowed to a more-than four-year low of 0.5 percent in March, to ease and preserve the value of fixed-income payments.
Spanish bonds returned 6.1 percent this year through April 3, according to Bloomberg World Bond Indexes. Greece’s were the best performers, earning 31 percent, followed by Portugal’s, which rose 13 percent and a 5.6 percent gain in Italy’s. Treasuries lagged behind, with a return of 1.4 percent.
The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.317 percent on April 3, the lowest in the history of the euro area, according to Bank of America Merrill Lynch indexes. That’s down from 6.02 percent on July 26, 2012, the day Draghi pledged to do whatever it takes to protect the euro.
Germany is due to auction as much as 2 billion euros of inflation-linked bonds due in 2030 on April 8, its longest maturity to date. It also plans to sell 4 billion euros of 2016 bonds. Italy, the Netherlands and Austria are also scheduled to auction debt next week.