Bond Traders Soothed by Draghi Before Data on Euro-Area Growth

  • ECB revised purchase limit for bonds under QE program
  • Italian 10-year bonds post first advance in three weeks

Bond investors can look forward to next week with reassurance from the European Central Bank that it will act to counter deflationary pressures. Next they need to prepare for a euro-area economic report that will keep growth issues in the spotlight.

Italian government bonds advanced for the first time in three weeks after the ECB stirred speculation it will extend asset purchases to help boost inflation and growth. President Mario Draghi revamped the program Thursday, raising the purchase limit to 33 percent per issue of a country’s debt stock, up from 25 percent previously. That helped boost bonds across the region.

As eyes turn to the Federal Reserve, which will meet to set policy Sept. 16-17, the weaker global outlook prompted the ECB to downgrade its growth and consumer-price forecasts through 2017 across the board. A report Sept. 8 will confirm economic expansion in the euro-area slowed last quarter, according to the median estimate of economists before the European Union’s statistics office publishes the data.

“They’re very serious about the risk and they’re ready to be proactive, as and when needed to avert that,” said Orlando Green, a fixed-income analyst at Credit Agricole SA’s corporate and investment-banking unit in London. “You’re not going to push the market down to where it was in terms of bund yields at the start of the second quarter, though.”

The yield on Italian 10-year bonds fell four basis points, or 0.04 percentage point, in the week to 1.88 percent as of the 5 p.m. London close on Friday. The 1.5 percent security rose 0.355, or 3.55 euros per 1,000-euro ($1,112) face amount, to 96.72.

German 10-year bund yields dropped seven basis points to 0.67 percent in the week, while Portugal’s slumped nine basis points to 2.51 percent, the lowest since Aug. 20. The bund yield was 0.18 percent at the start of the second quarter.

Smaller Returns

Euro-area bonds have underperformed over the past three months, gaining 1.2 percent through Sept. 3, according to Bloomberg World Bond Indexes. U.S. Treasuries returned 1.5 percent and U.K. debt 3.2 percent.

The ECB began a program of asset purchases in March that initially sent euro-region bond yields to record lows, encouraging consumers and companies to spend.

Stimulus will continue until the end of September 2016 “or beyond, if necessary,” Draghi told reporters on Sept. 3, in a tweak to language that hints more strongly than before at a readiness to prolong purchases. “The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” he said.

Gross domestic product in the 19-nation region is forecast to have grown 0.3 percent in the three months through June 30, compared with 0.4 percent in the previous quarter.

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