Investors Counting on Easy Money Shield Bonds From Turmoil

  • SocGen says there's more chance nations will maintain stimulus
  • Fed's Dudley casts doubt on September liftoff on rates

The prospect of other central banks following China’s example and easing policy is supporting European bonds amid the turmoil in stock markets.

Even after rising in four of the past five trading days, Italy’s 10-year bond yield remains below 2 percent, while the spread that investors get for holding the securities instead of benchmark German bunds is lower than its 12-month average.

New York Federal Reserve President William Dudley said Wednesday that the global market rout had reduced the case for raising U.S. interest rates in September. Earlier in the day, European Central Bank Executive Board member Peter Praet said officials are prepared to tweak their 60-billion euro ($69 billion) a month quantitative-easing program if the euro zone’s inflation outlook deteriorates.

“We did see a little bit of widening in the non-core space but not that much,” said Vincent Chaigneau, the London-based global head of rates and foreign-exchange strategy at Societe Generale SA. Investors are hoping “that maybe central banks will do more,” he said.

Italy’s 10-year bond yield fell by less than one basis point, or 0.01 percentage point, to 1.98 percent as of 4:15 p.m. London time. The extra yield the debt offers over equivalent German bunds, Europe’s benchmark government securities, was at 127 basis points.

Record Spread

While that’s up from a low for this year of 84 basis points as the ECB started its asset purchases in March, it’s a fraction of the record-high 575 during Europe’s 2011 debt crisis. And it’s only 13 basis points higher than on Aug. 10, the day before China sparked global volatility by devaluing the yuan.

The euro-zone one-year inflation swap rate, a market gauge of the outlook for consumer prices, was at minus 0.07 percent, set to close below zero for a third straight day.

U.S. bonds have also been resilient, with the 10-year Treasury yield falling to a four-month low earlier this week.

Dudley and the ECB’s Praet vindicated SocGen’s argument that policy makers may respond to threats to the economy by either easing further or delaying plans to tighten policy.

Traders have cut the odds on a U.S. rate increase this year to less than 50 percent.

“The decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told a news conference at the New York Fed.

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