Spanish government bonds rose, pushing 10-year yields to the lowest in more than eight years, after European Central Bank President Mario Draghi said further gains in the euro would trigger more monetary stimulus.
Italian and Portuguese securities also rallied before a euro-area report this week that economists said will confirm inflation slowed to the least in four years. The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds shrank for the first time in three days amid speculation ECB stimulus will include debt purchases. Italian consumer-price inflation cooled to the least since 2009, a government report showed today.
“The ECB is looking to talk the markets down and keep markets stable, particularly in terms of the currency,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “That’s underpinning the periphery recovery story. The risk is that the ECB use too much rhetoric and not enough action. That’s maybe why the periphery trade is losing a little bit of momentum.”
Spain’s 10-year yield dropped five basis points, or 0.05 percentage point, to 3.14 percent at 4:40 p.m. in London after dropping to 3.13 percent, the lowest since October 2005. The 4.5 percent bond due March 2024 rose 0.41, or 4.10 euros per 1,000-euro ($1,382) face amount, to 105.60.
Similar-maturity Italian yields declined four points to 3.18 percent after falling to 3.14 percent on April 7, the lowest since Bloomberg started collecting the data in 1993. Portugal’s fell five basis points to 3.91 percent.
“The strengthening of the exchange rate would require, to make our monetary policy stance to remain equally accommodative, it would require further monetary policy accommodation,” Draghi told reporters in Washington on April 12. “The strengthening of the exchange rate requires further monetary stimulus. That’s an important dimension for our price stability.”
Bank of France Governor Christian Noyer said the strong euro was a “serious preoccupation,” while Bundesbank President Jens Weidmann said the exchange rate was one of the factors in the ECB’s inflation assessment and officials “are considering” its effects.
The euro has appreciated 5.4 percent versus the dollar during the past 12 months. It fell 0.5 percent today to $1.3821.
“The impact of the ECB comments is clearly positive for the complete European government bonds-universe with hopes for further conventional or unconventional measures by the ECB no later than the June meeting,” said Michael Rottman, head of fixed-income research at UniCredit SpA in Munich. “We would expect some additional spread tightening between the periphery and core, especially bunds.”
The extra yield investors demand to hold Spanish 10-year securities instead of similar-maturity German bunds shrank seven basis points to 161 basis points, while the spread for Italy contracted six basis points to 165 basis points. Germany’s 10-year yield climbed two basis point to 1.53 percent.
Spanish and Italian bonds both advanced on April 3 when Draghi signaled policy makers were unanimous in their agreement to use unconventional measures if needed to spur inflation.
Annual euro-area consumer-price gains slowed to 0.5 percent last month, according to economists surveyed by Bloomberg before the April 16 report. Slower inflation preserves the purchasing power of the fixed payments from bonds.
The bonds of Europe’s higher-yielding nations have surged this year amid speculation the ECB will act to boost the region’s economy. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.24 percent on April 10, the lowest since the data was started in 1997, according to Bank of America Merrill Lynch indexes. The yield climbed as high as 9.55 percent in 2011.
Italy’s securities may outperform Spanish ones this week as Italy sells a six-year inflation-linked bond aimed at retail investors from today through April 17, UniCredit’s Rottman said.
Italian bonds linked to Italian inflation are attractive compared with those linked to euro-zone inflation and also to nominal bonds “as market participants are too negative in regard to Italian inflation,” he said.
Italy may sell 15-year bond via banks next as it has reached a size that “could be considered good for opening a new line,” Maria Cannata, head of Italy’s debt agency said in an interview today in Rome.
Italian bonds returned 5.8 percent this year through April 11, according to Bloomberg World Bond Indexes. Spain’s gained 6.3 percent and Germany’s earned 2.9 percent.