European Bonds Jump as Draghi Signals Potential June Move

Euro-area government bonds rose, sending Spanish and Italian yields to record lows, as European Central Bank President Mario Draghi said policy makers would be comfortable adding economic stimulus measures next month.

German 10-year yields approached the least in a year and the euro erased an advance that took it to a 2 1/2-year high as Draghi signaled new economic forecasts in June may give the ECB scope to take action. Monetary stimulus tends to boost bond prices by reducing borrowing costs. The ECB left its key interest rate at a record-low 0.25 percent at today’s policy meeting in Brussels.

“Draghi is keeping market hopes for further action alive without committing himself too closely to a particular date or type of action,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “This is something that is a short-term positive for European government bonds.”

Italy’s 10-year yield dropped eight basis points, or 0.08 percentage point, to 2.93 percent at 4:42 p.m. London time after falling to 2.912 percent, the lowest since Bloomberg started tracking the securities in 1993. The 4.5 percent bond due in March 2024 gained 0.75, or 7.50 euros per 1,000-euro ($1,386) face amount, to 113.475.

Spain’s yield declined eight basis points to 2.89 percent after reaching an all-time low of 2.875 percent.

Volatility on Italian bonds was the highest in euro-area markets today, followed by those of Ireland and Spain, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

Investor Optimism

Investors are pouring cash into euro-area bond markets amid optimism the ECB will to support the debt should the region’s recovery falter. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.16 percent on May 6, the lowest since the formation of the currency bloc, according to Bank of America Merrill Lynch indexes. The rate climbed as high as 9.55 percent in November 2011.

ECB officials are debating how much stimulus to add as the euro-region economy faces the threat of deflation. While Draghi gave no signal that adding quantitative easing was imminent, he stepped up his expressions of concern that the euro’s exchange rate was slowing inflation.

“The Governing Council is comfortable with acting next time, but before we want to see the staff projections that will come out in the early June,” Draghi said at a press conference in Brussels. “There wasn’t a decision today. It’s a preview of the discussion we will have next month.”

Germany, France

Germany’s 10-year yield fell three basis points to 1.45 percent, France’s declined five basis points to 1.90 percent and Austria’s dropped four basis points to 1.67 percent.

The yield on German two-year notes slipped three basis points to 0.12 percent after reaching 0.11 percent, the lowest level since March 5.

The euro weakened 0.3 percent to $1.3871 after earlier rising to $1.3993, the strongest since October 2011.

Draghi’s “heavy hint” of upcoming action has raised expectations that the ECB will be unwilling to disappoint in one-month’s time, UniCredit SpA chief economist Marco Valli in Milan wrote today in a research note. Any cut in the deposit rate is likely to be small, probably 10 basis points, he said.

Italian bonds returned 7.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spain’s gained 7.6 percent. Germany had the worst-performing euro-area sovereign debt market, with a 3.2 percent gain.

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