Europe's Higher-Yielding Bonds Reap Benefit of Draghi's QE Hint

Markets Show Confidence in Draghi to Deliver QE
  • Italy-Germany yield spread holds below 1 percentage point
  • Portuguese bonds left behind peers amid political stalemate

Italy’s bonds are yielding the least relative to benchmark German debt since March as the European Central Bank’s hint that it will expand monetary stimulus this year boosts the allure of the region’s riskier securities.

The extra yield, or spread, that Italy’s 10-year securities offer over German bunds held below a percentage point for a third day. Euro-zone debt has been buoyed since ECB President Mario Draghi pledged on Oct. 22 to reexamine the scope of its quantitative-easing program, with higher-yielding securities leading the advance. Portuguese bonds trailed their peers amid a political stalemate following elections.

“There’s a positive outlook because you have the ECB at play again,” said Luca Cazzulani, senior fixed-income strategist at UniCredit SpA in Milan. “The measures will push investors to look for sources of yield” and markets “are convinced the ECB will not disappoint.”

Italy’s 10-year bond yield fell one basis point to 1.49 percent as of 4:15 p.m. London time, after sliding 11 basis points last week. The price of the 1.5 percent security due June 2025 was at 100.14 percent of face value.

Smallest Spread

German 10-year yields dropped one basis point to 0.50 percent, leaving the spread with Italian bonds at 99 basis points. The gap narrowed to as little as 94 basis points on Oct. 23, a day after Draghi’s comments.

Portuguese bonds declined amid speculation Prime Minister Pedro Passos Coelho will fail to win the political backing to go ahead with his second term. Social Democratic Premier Coelho won the most seats in the first general election since 2011 earlier this month, though his coalition fell short of the majority it enjoyed in the past four years.

Portugal’s 10-year bond yield climbed eight basis points to 2.45 percent. The spread over Italy’s debt widened to 96 basis points, the most on a closing-price basis since February. They yielded 195 basis points more than bunds, the most since Sept. 24 based on closing prices.

Similar-maturity Spanish yields were little changed at 1.63 percent.

Bonds pared their gains after a report Monday showed a smaller-than-predicted decline in German business confidence.

The Ifo institute’s business-climate index for Germany slipped to 108.2 in October, from 108.5 last month. The median estimate in a Bloomberg survey of economists foresaw a drop to 107.8. The ECB’s easing program is meant to revive growth and boost euro-area inflation, which turned negative in September.

A measure of inflation expectations favored by Draghi advanced to its strongest level in more than two months, which may be a sign that the central bank’s stimulus is beginning to shift perception of expected price growth.

The five-year, five-year forward inflation swap rate, a gauge of price-growth expectations in the five years starting 2020, was at 1.74 percent, the most since Aug. 10 based on closing prices, and up from 1.68 percent on Oct. 21, the day before the ECB’s last policy announcement.

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