Italian and Spanish 10-year government bond yield spreads over benchmark German bunds will narrow further toward 100 basis points before valuations become stretched, according to Carmignac Gestion SA.
Yields on Italy and Spain’s 10-year securities dropped to records last week after European Central Bank President Mario Draghi said on Aug. 22 that officials are “ready to adjust our policy stance further,” fueling speculation they may embark on a strategy of asset purchases to boost the economy. The central bank’s Governing Council is set to meet in Frankfurt on Sept. 4.
“From a spread perspective, Spanish and Italian bonds in particular, and some small positions in Portugal and Greece, remain compelling,” Jean Medecin, who helps oversee the equivalent of about $66 billion as a member of the investment committee at Carmignac Gestion SA in London, said in an interview today. “The ECB will try to comfort investors that it’s really committed to anchoring inflation expectations.”
Italy’s 10-year yield fell one basis point, or 0.01 percentage point, to 2.42 percent as of 5 p.m. London time. The 3.75 percent bond due in September 2024 rose 0.13, or 1.30 euros per 1,000-euro face amount, to 111.855.
Spanish 10-year rates added two basis points to 2.25 percent, while 30-year yields climbed six basis points to 3.52 percent, the biggest daily increase since July 2.
The extra yield investors demand to hold Italian 10-year debt over German bunds was little changed at 154 basis points. The spread narrowed to 132 basis points on June 9, the least since April 2011. That’s down from as much as 575 basis points in November 2011. The yield difference between Spanish and German 10-year securities widened three basis points to 137 basis points.
Longer-dated Spanish securities fell as the Madrid-based Treasury said it sold 1 billion euros in 50-year bonds for the first time in a private placement via banks today.
Spain’s Treasury sold the 4 percent bonds maturing in October 2064, it said in a statement. Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA organized the deal. Spain has covered 78.4 percent of its medium to longer-term funding program with this sale.
The nation plans to auction as much as 3 billion euros in bonds due in October 2024 and October 2044 on Sept. 4, the Treasury said today.
Five economists forecast ECB policy makers will cut the refinancing rate by 10 basis points to a record 0.05 percent on Thursday, while the remaining 50 predict no change, according to Bloomberg surveys.
“Expectations are very high on Draghi announcing measures or giving some hints about quantitative easing,” said Daniel Lenz, lead market strategist for the euro area at DZ Bank AG in Frankfurt. “Bonds are benefiting from this, especially peripheral bonds given the carry they offer,” he said, referring to the strategy of selling assets with lower yields and investing in those paying higher returns.
Yields on German one-, two- and three-year securities were below zero, meaning investors holding the debt until it matures will receive less back than they paid to buy it. Germany’s benchmark 10-year bund yield was little changed at 0.88 percent. France’s two-year rate dropped below zero for the first time, touching minus 0.002 percent.
The average yield to maturity on euro-area government securities dropped to a record-low 1.045 percent on Aug. 27, according to Bank of America Merrill Lynch Indexes.
The rate has tumbled from 2.06 percent at the start of this year as concern about low inflation in the region prompted ECB policy makers to lower interest rates and pledge an unprecedented round of stimulus measures in June.
Euro-area government securities returned 10 percent this year through Aug. 29, Bloomberg World Bond Indexes show. Spain’s have earned 13 percent, with Italy’s gaining 12 percent and Germany’s 7.4 percent.
Volatility on Finnish bonds was the highest in the euro area today, followed by those of Germany and Belgium, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.