Italian Bonds Rise as Traders Increase Odds for More QE From ECB

  • ABN Amro sees ECB increasing size of QE before year-end
  • Italian 10-year yields at lowest in more than two weeks

Italian government bonds climbed with Spanish and Irish securities as investors sought higher-yielding assets amid speculation the European Central Bank will expand its asset-purchase program.

The euro area’s peripheral debt outperformed bonds of nations with higher ratings, which are deemed safer assets, as stocks worldwide rebounded from a selloff during past weeks. Risk appetite returned to markets amid speculation the Chinese government is intervening to prop up its equity market. 

After ECB President Mario Draghi signaled last week that the central bank could expand its quantitative-easing program to counter slower growth and inflation, analysts at ABN Amro NV said monthly purchases will increase to 80 billion euros ($89 billion) from 60 billion euros by year-end.

Bond gains “follow through from Draghi last week, as people start to price in more QE later this year or early next year,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “Periphery should continue to perform well in that environment.”

Italian 10-year yields fell six basis points, or 0.06 percentage point, to 1.84 percent as of 4:32 p.m. London time, having touched 1.83 percent earlier, the lowest level since Aug. 21. The 1.5 percent security due in June 2025 rose 0.5, or 5 euros per 1,000-euro face amount, to 97.095. Spain’s 10-year yield dropped nine basis points to 2.05 percent, while that on similar-maturity Irish bonds declined eight basis points to 1.34 percent.

Bund Auction

Germany’s 10-year bunds were little changed before the nation auctions 4 billion euros of benchmark debt on Wednesday. The yield was at 0.68 percent. Germany alloted 745 million euros of index-linked securities due in April 2030 on Tuesday.

The Stoxx Europe 600 Index of shares climbed 1.3 percent, the most in three days, while the Shanghai Composite Index stocks rallied in a pattern that on recent occasions has been consistent with state intervention.

“The announcement of more QE will come before year-end, most likely in October,” ABN Amro strategists Nick Kounis and Kim Liu wrote in a note to clients. “The ECB has said it wants to assess the impact of recent developments in markets and China -- that should not take too long. We have lowered our 10-year bund yield forecasts. We now expect yields to drop to 0.5 percent by year-end,” compared with the previous estimate of 0.7 percent.

Commerzbank AG, which is ranked first among dealers by Germany’s debt agency, also predicted last week that the ECB will increase its asset purchases in December.

Debt Sales

Euro-area bonds due in 30 years underperformed those with shorter maturities amid longer-dated debt auctions in the region. The Netherlands sold 890 million euros of securities due in January 2047, while Belgium mandated banks for a sale of 23-year bonds.

German 30-year yields rose two basis points to 1.43 percent, while those on similar-maturity Italian bonds fell three basis points to 2.97 percent.

The yield difference, or spread, between German five- and 30-year securities reached the widest in a month on Tuesday. The yield curve steepened for a second day after a revamp of the European Central Bank’s bond-buying program increased relative demand for short-dated debt.

The ECB raised the limit on bond purchases under its quantitative-easing program to 33 percent per issue from 25 percent previously, giving national central banks more flexibility.

“Speculation is that the Bundesbank has more ability to buy in the short- to medium-term bonds, thus more room to avoid engaging in this illiquid ultra-long sector,” said Benjamin Schroeder, a Frankfurt-based interest-rate strategist at Commerzbank. Yield curves are also steepening because of supply, he said.

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