The bonds of the euro area’s higher-yielding nations surged as European Central Bank President Mario Draghi lowered interest rates and unveiled an unprecedented round of stimulus measures to boost the region’s economy.
Italian two-year yields dropped to a record after ECB officials cut the main refinancing rate to 0.15 percent and also moved the deposit rate below zero for the first time. The yield difference between Spanish 10-year bonds and German debt reached the narrowest since July 2010 as Draghi said the ECB will introduce targeted offerings of liquidity to banks to encourage them to lend to the real economy. Officials will also start work on purchases of asset-backed securities, he said.
“Draghi’s gone all-in today,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Don’t think of this as a bazooka. This is more like a fleet of killer drones to target deflation from all angles. It’s a quantitative-easing style response without the risk-free asset rally, so the periphery grinds in in spread terms.”
Italy’s two-year yield fell 13 basis points, or 0.13 percentage point, to 0.62 percent at 4:16 p.m. London time after sliding to 0.594 percent, the lowest since Bloomberg began collecting the data in 1993. The 3.75 percent note due April 2016 rose 0.23, or 2.30 euros per 1,000-euro ($1,361) face amount, to 105.735.
The nation’s five-year yield dropped 12 basis points to 1.59 percent after sliding to 1.57 percent, also a record low. The 10-year rate declined nine basis points to 2.94 percent.
The decision to cut the benchmark interest rate by 10 basis points was forecast by 21 of 60 economists surveyed by Bloomberg. Two predicted no change with the remaining 37 calling for larger reductions. A negative deposit rate was forecast by 44 of 50 analysts in a separate survey.
Average yields on bonds across the euro region fell to a record in the past month, helping to generate returns of 5.7 percent this year through yesterday, according to Bloomberg World Bond Indexes.
German 10-year bunds rose for the first time in six days, with the yield falling two basis points to 1.41 percent. The rate slid six basis points after the ECB last cut its key rate on Nov. 7. The German two-year rate was little changed at 0.05 percent after dropping as much as two basis points to 0.037 percent, the lowest since May 31, 2013.
“The ECB has adopted quite an aggressive easing stance, not just utilizing a range of liquidity enhancing measures but also hinting at QE in coming month,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “This is good news for peripherals but the trough in 10-year bund yields may have been reached.”
The implied yield on the Euribor futures contract expiring in December was 0.18 percent today after reaching 0.175 percent yesterday, the least on record, according to closing-price data. Three-month Euribor, the rate banks say they pay for three-month loans in euros, was at 0.292 percent, the lowest since March 6.
The deposit rate was cut to minus 0.10 percent, a move which is “quite powerful” for the fixed-income market, according to Michael Krautzberger, the London-based head of euro fixed income at the world’s biggest money manager BlackRock Inc. Krautzberger, who helps oversee $4.3 trillion of assets, spoke in an interview on Bloomberg Television before the decision.
The average yield to maturity on euro-area government bonds fell to 1.4271 percent on May 28, the least on record, and was at 1.4919 percent yesterday, according to the Bank of America Merrill Lynch Euro Government Index.
Spain sold 4.5 billion euros of notes due in April 2017 and April 2019 at record-low yield today. It allotted 2.4 billion euros of the five-year securities at an average yield of 1.52 percent, down from 1.648 percent at a previous auction on May 22. The Madrid-based Treasury sold 2.1 billion euros of the three-year notes at 0.968 percent, also the least on record.
The rate on the 2.75 percent note due in April 2019 declined 10 basis points to 1.46 percent after sliding to 1.442 percent, the lowest since Bloomberg began compiling the data in 1993. Spanish two-year yields slipped 11 basis points to 0.60 percent.
The yield spread between Spanish 10-year bonds and similar-maturity German securities narrowed three basis points to 142 basis points, and reached 133 basis points, the least since July 2010.
Volatility on Italian bonds was the highest in euro-area markets, followed by those of Spain and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
Ireland’s 10-year yield fell below that of similar-maturity Treasury notes for the first time since November 2007, based on closing prices. The Irish 10-year yield dropped six basis points to 2.58 percent. Benchmark Treasury yields were little changed at 2.59 percent.
Italy’s government securities returned 7.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. France’s earned 4.5 percent, Germany’s 3.8 percent and Spain’s gained 8.2 percent.