- Spanish-German spread reaches highest level since September
- Draghi to `leave the door open' to more easing: Rabobank
Italian government bonds declined before the European Central Bank’s policy decision as investors awaited signals from President Mario Draghi on whether the worsening global outlook will prompt more easing measures.
Spanish bonds also declined. The yield difference, or spread, between the nations’ 10-year securities and their German peers climbed to the widest since September as the slide in oil and the rout in equity markets showed little signs of abating. The move signaled that the ECB’s 60-billion-euro ($65 billion) monthly bond-buying program may be failing to shield the region’s less-creditworthy sovereign debt from the global turmoil.
With the rout in oil prices further threatening the ECB’s prospects for returning inflation to its target of just below 2 percent, speculation is growing that the central bank might hint that additional easing measures were in the pipeline. Even so, all 42 economists surveyed by Bloomberg predict the central bank to maintain the deposit rate at minus 0.3 percent on Thursday.
“It will be a huge surprise if they have anything other than a reasonably dovish tone,” said Lyn Graham-Taylor, a rates strategist at Rabobank in London. “They will leave the door open to doing more. January is too soon, we are calling for a 10 basis point deposit rate cut in March.”
Italian 10-year bond yields climbed six basis points, or 0.06 percentage point, to 1.71 percent, at 7:42 a.m. London time. The 2 percent security due in December 2025 fell 0.56, or 5.60 euros per 1,000-euro face amount, to 102.67. The yield on similar-maturity Spanish bonds added six basis points to 1.84 percent.
Germany’s 10-year bund yield was at 0.49 percent, leaving the yield difference with Italian bonds at 122 basis points, the most since Sept. 8. The Spanish-German spread reached 135 basis points.
Data released this week showed that the annual inflation rate stood at 0.2 percent in December. The five-year, five-year forward inflation-swap rate, a rolling gauge of inflation expectations that Draghi cited in the past when advocating monetary stimulus, fell to 1.58 percent on Wednesday, the lowest since September based on closing prices.
Bond yields across the region dropped to record lows after ECB President Mario Draghi stoked expectations of further easing at his Oct. 22 press conference. They rebounded on Dec. 3, with German 10-year yields climbing the most since November 2011, after the 10-basis-point cut in the deposit rate and extension of the quantitative-easing program by six months underwhelmed some investors expecting more aggressive easing measures.
This would mean that Draghi will likely adopt a more cautious approach and refrain from “committing heavily towards acting” this time, according to Peter Chatwell, head of rates strategy at Mizuho International Plc in London.
There was a “lesson learned with regards to expectation management and how markets reacted in December,” he said. “I don’t think there is going to be an immediate inclination from the ECB to be extremely dovish.” He added there was a “scope for disappointment for the market” which could cause spreads to “widen even further.”