Spanish Bonds Beating German Peers Signals Wagers on Stimulus

  • Pimco says additional QE should focus on euro area's periphery
  • Draghi reiterates that ECB can adjust its stimulus program

Spanish government bonds posted a second weekly advance relative to their German peers as improving market sentiment and speculation of more European Central Bank stimulus boosted demand for the euro region’s higher-yielding assets.

The extra yield, or spread, investors earn for holding Spain’s 10-year bonds instead of similar-maturity German securities narrowed to the least in more than two months. Higher-yielding bonds extended their advantage versus benchmark German bunds as ECB President Mario Draghi said the institution can adjust the size, duration and composition of its quantitative-easing program.

German 10-year bunds declined on Friday, extending their biggest weekly drop since August, as European stocks headed for the biggest weekly gain since January.

Investors in the region’s higher-yielding assets were heartened by signs of a worsening outlook for the German economy, Europe’s biggest, and by Federal Reserve comments. Minutes from the Fed’s last policy meeting showed support for waiting for more information on the economy before raising interest rates.

“The periphery has been benefiting on the back of the return of risk appetite,” said Christian Lenk, a rates strategist at DZ Bank AG in Frankfurt. “On the other hand we have ongoing speculation about QE extension from the ECB. It looks like monetary policy is going to stay extremely accommodative on both sides of the Atlantic.”

Spain’s 10-year bond yield was little changed at 1.83 percent at the 5 p.m. London close on Friday. The price of the 2.15 percent security due October 2025 was at 102.89 percent of face value. Benchmark German bund yields rose three basis points, or 0.03 percentage point, to 0.62 percent, up 11 basis points since Oct. 2. The Stoxx Europe 600 Index of shares climbed 4.3 percent this week, the most since July.

Spread Narrows

The yield spread between Spanish and German securities was 122 basis points on Friday, down from 127 basis points at the end of last week. The gap earlier touched 121 basis points, the tightest since August. German bunds yielded 108 basis points less than their Italian peers, the least since May.

Pacific Investment Management Co. said that any extension of the ECB’s 1.1 trillion-euro ($1.3 trillion) asset-purchase program should focus on the bonds of Europe’s higher-debt and -deficit nations. The ECB currently targets 60 billion euros a month of asset purchases running through at least September 2016 as it seeks to boost inflation toward its goal of just under 2 percent.

In a statement at the annual meetings of the International Monetary Fund in Lima, Draghi said that “developments surrounding the slower growth in emerging-market economies are posing renewed risks to the euro-area outlook.” Even so, the region is proving “resilient” and headline inflation is expected to rise toward the end of the year because of base effects relating to energy prices, he said.

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