Draghi Without Limits Gives Periphery Debt a Push as Havens Fall

  • Yield spreads narrow from Sept. highs on ECB's stimulus signal
  • Gains in stocks, oil reduce demand for safer securities

The prospect of more stimulus from the European Central Bank helped shave the extra yield offered by Spanish and Italian bonds over benchmark German debt from the most since September.

Bonds from the continent’s peripheral nations rose earlier on Friday, extending their advance from the previous day, before falling back in the run-up to the week’s close. German 10-year bunds dropped, pushing yields up from a three-month low, as a bounce in stocks and oil prices reduced demand for securities considered to be havens.

‘Turn in Sentiment’

ECB President Mario Draghi sparked the narrowing in Spanish and Italian bond spreads when he said Thursday that there are “no limits” to how far officials are prepared to go to meet their inflation goals. He hinted that additional easing measures are likely as early as the next policy meeting in March.

“We’ve seen a turn in overall risk sentiment with a more dovish message from the ECB,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Higher oil prices” are sapping demand for German bunds, while “expectations of more easing from the ECB are having a positive impact on peripherals.”

Weekly Advance

Spanish bonds fell on Friday but rose in the week. The nation’s 10-year debt yield climbed one basis point, or 0.01 percentage point, to 1.73 percent as of the European market close on Friday, a two basis-point weekly drop. The 2.15 percent security due in October 2025 slipped 0.08, or 80 euro cents per 1,000-euro ($1,081) face amount, to 103.73.

That left the extra yield over similar-maturity German bunds at 1.25 percentage point, down from as much as 1.35 percentage point before the Thursday press conference where Draghi made his remarks. That was the widest spread since Sept. 29.

The yield gap on 10-year Italian bonds narrowed to 1.09 percentage point, from as wide as 1.22 on Thursday, which was the most since Sept. 8. The German 10-year bund yield advanced three basis points to 0.48 percent, a day after it touched a three-month low of 0.43 percent.

Draghi struck a more somber note in Davos, Switzerland, on Friday, when he said he remains concerned about the euro-zone inflation outlook, while adding the ECB has “plenty of instruments” to help it achieve price stability.

A report next week will estimate annual inflation quickened to 0.4 percent for January, according to economists surveyed by Bloomberg. That’s still a fraction of the central bank’s goal of just under 2 percent.

The five-year, five-year forward inflation-swap rate, a rolling gauge of inflation expectations that Draghi has said he watches, was at 1.57 percent, close to the lowest based on closing prices since September.

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