- Draghi defends ECB decision, reinforces easy monetary policy
- Gauge of euro-area inflation outlook falls as oil slides
After last week’s selloff, euro-area government bonds rallied on Monday, pushing benchmark German 10-year yields down from the highest level since September.
Spanish securities led the advance after oil extended its decline below $40 a barrel, damping the inflation outlook and supporting fixed-income assets. While the European Central Bank’s decision on Dec. 3 to cut its deposit rate by 10 basis points and extend its 60 billion-euro ($65 billion) a month asset-purchase program by six months initially underwhelmed markets, ECB President Mario Draghi reassured investors the following day that further stimulus can be implemented if needed.
The ECB’s decision last week was a “massive disappointment,” said Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen. Investors are now focusing on the fact that “rates are not going to go high for a long time and the ECB will extend the program,” he said.
German 10-year bund yields fell ten basis points, or 0.1 percentage point, to 0.58 percent as of the 5 p.m. London close. The 1 percent security due in August 2025 rose 0.925, or 9.25 euros per 1,000-euro face amount, to 103.93. The yield climbed 22 basis points last week, the biggest increase since June 5 and touched 0.74 percent on Friday, the highest since Sept. 18.
Similar-maturity Spanish bond yields dropped 11 basis points to 1.62 percent and those on French securities declined 10 basis points to 0.90 percent.
Draghi defended the ECB’s decision at an event in New York on Dec. 4 and said he’s confident the central bank will meet its inflation goal of just under 2 percent, a level not seen since January 2013. The ECB kept up its accelerated pace of bond buying in November, with its holdings of public and private-sector debt under quantitative easing climbing by 62.6 billion euros.
Oil declined after OPEC effectively abandoned its long-time strategy of limiting production to control prices, helping to reinforce views that the ECB will need to keep its monetary policy loose in order to fight deflationary pressures.
The five-year, five-year forward inflation-swap rate, a gauge of consumer-price growth expectations in the euro area in the five years starting 2020, was at 1.69 percent on Friday, its lowest level since Oct. 21 based on closing-price data.
The swap rate “fell quite dramatically after the ECB meeting,” Danske Bank’s Soerensen said. “The nail in the coffin was the OPEC meeting” which led to “lower oil prices,” he said, adding that “there will be plenty of stimulus going forward.”