Investors Seizing on Economic Data as QE Sign Boost Euro Bonds

  • German, Italian securities advance for 5th day after GDP data
  • Sluggish growth is ECB's `final push to be decisive': ABN Amro

Bonds advanced from Germany and France to Italy after data showed economies remain fragile across the region, bolstering the case for the European Central Bank to provide more monetary stimulus.

German and Italian 10-year securities climbed for a fifth straight day. With sluggish growth and zero inflation in the 19-nation euro-zone economy, pressure is building for ECB President Mario Draghi to act on his repeated pledges to expand the bank’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan if needed or to lower its already negative deposit rate.

“The euro-area recovery remains tepid and disinflationary pressures persist,” said Nick Stamenkovic, a fixed-income strategist at Edinburgh-based brokerage RIA Capital Markets Ltd. “While the overall picture is consistent with a continued gradual euro upturn, it’s not expected to prevent further ECB action by year-end. Bonds should remain well-supported.”

The yield on Germany’s 10-year bund, the euro region’s benchmark government debt, dropped five basis points, or 0.05 percentage point, to 0.56 percent as of the market close at 5 p.m. London time. The 1 percent security due August 2025 rose 0.475, or 4.75 euros per 1,000-euro ($1,073) face value, to 104.175.

Germany’s two-year note yield fell one basis point to minus 0.37 percent, after sliding to a record minus 0.372 percent on Thursday. Italy’s 10-year bond yield slipped four basis points to 1.56 percent.

Portuguese Reprieve

Portuguese bonds underperformed their euro-area peers this week, sending the yield spread over German bunds to a four-month high, as investors awaited a credit-rating review that could have seen the Iberian nation’s securities excluded from the ECB’s quantitative-easing plan.

DBRS Ratings Ltd. ended up confirming Portugal’s rating at BBBL, its lowest investment grade, late Friday. That kept the country’s securities eligible for QE.

The spread Portuguese bond yields offer over 10-year German bunds widened to as much as 223 basis points, the biggest since July.

ABN Amro Bank NV predicts the ECB will cut its deposit rate by 10 basis points to minus 0.3 percent and increase its monthly bond purchases by 20 billion euros at its last policy meeting of the year on Dec. 3.

Euro-area economic growth slowed to 0.3 percent in the third quarter, down from 0.4 percent in the previous period, which was also the median estimate of analysts in a Bloomberg survey. The German and French economies each grew 0.3 percent, their national statistics offices said Friday.

“If the ECB needed a final push to be decisive, this is it,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “This outcome is lower than the ECB’s staff projections, which would add to the already strong case for it to step up monetary stimulus in December.”

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