Bonds Rally as Draghi Says QE Program Must Be Fully Implemented

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Euro-area government bonds rose as European Central Bank President Mario Draghi said policy makers’ debt-buying plan must be implemented in full to work.

The 1.1 trillion euro ($1.2 trillion) quantitative-easing plan has already changed the face of the region’s debt markets. Yields on about $2 trillion of euro-denominated sovereign debt are currently below zero, with $582 million of that below the ECB’s deposit rate of minus 0.2 percent. Germany’s 10-year bonds, the region’s benchmark government securities, set a record-low yield during a press conference given by Draghi on Wednesday, and an auction earlier in the day reflected the clamor of demand that the ECB program has inspired.

The bond purchases will continue until there’s a sustained adjustment in inflation, Draghi said at the media briefing after a meeting of monetary policy makers in Frankfurt. It’s so far proceeding smoothly and concern that the buying is creating a scarcity of securities is “premature,” he said.

“Draghi remains firm on not changing the QE program -- certainly at this early stage,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “The prospect of buying continuing at the same pace for at least the next meeting, probably beyond, is likely the reason the European government bonds are pushing higher.”

Benchmark German 10-year yields fell three basis points, or 0.03 percentage point, to a record-low 0.105 percent at 4:22 p.m. London time. The 0.5 percent bund due in February 2025 rose 0.325, or 3.25 euros per 1,000-euro face amount, to 103.86.

ECB Gameplan

Yields in at least five other euro-area nations also declined to all-time lows. Germany sold 3.27 billion euros of 10-year bunds on Wednesday, drawing a record-low average yield of 0.13 percent and bids of 4.77 billion euros for the securities.

The central bank, which has ruled out buying bonds with yields below its deposit rate, kept that rate unchanged at Wednesday’s meeting, as forecast by all 39 economists surveyed by Bloomberg. The main refinancing rate was held at a record-low 0.05 percent, matching a separate survey.

Bonds have rallied on concern the ECB is creating a shortage for investors. While the plan is due to run through September 2016, under current rules the ECB may run out of eligible securities to buy from some governments around the end of this year, according to Moody’s Investors Service.

‘Really Premature’

“To ask about scarcity in the bond market is really premature,” Draghi said. The press conference was temporarily disrupted when the ECB President was confronted by a protester.

Nonetheless, increasing demand has left buyers of bonds willing to accept a lower repayment when the securities mature than they pay today.

Yields on benchmark German securities with maturities up to eight years are below zero, and seven other countries in the currency bloc also have bonds with negative yields. Spain, which saw its yields surge in the debt crisis that swept the region earlier this decade, auctioned short-term bills with a negative yield last week.

The ECB reported purchases of 41.68 billion euros of government debt in March. German buying, at 11.1 billion euros, made up the biggest proportion. French bonds comprised 8.8 billion euros of the purchases and supranational debt 5.7 billion euros, the ECB said.

“The ECB has met or even exceeded expectations,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. “It’s our six-month forecast that 10-year bunds will go negative.”

Exhausted Supply

Twenty-eight percent of German bonds within the two- to thirty-year range have yields below the ECB’s minus 0.2 percent deposit rate, according to Moody’s, making them ineligible for the QE program. This share was 5 percent when the ECB announced buying in January.

“The QE program could exhaust the supply of eligible bonds from the governments of Germany, the Netherlands, Finland, France, Austria, Belgium, Ireland and Portugal,” Senior Vice President Marie Diron at Moody’s in London wrote in a note published Tuesday.

The ECB has made some securities available for lending to support bond- and repurchase-market liquidity. The lending program will do little to improve the shortage of government debt that firms are able to use for collateral, according to Barclays Plc and JPMorgan Chase & Co.

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