Third of Euro Bond Yields Go Negative on Draghi Stimulus Bets

  • ECB president says credibility hinges on making inflation goal
  • German two-, five-year yields touch record lows on haven bids

Euro-area government bonds advanced on the prospect of more stimulus from the region’s central bank, pushing the amount of sovereign debt yielding below zero percent to almost one-third.

The moves reflect how investors are positioning before the European Central Bank meets in March, mirroring the yield decline seen before the December gathering, when traders also were expecting more aggressive monetary policy to be announced.

Markets are currently fully pricing-in a 10 basis-point cut to the ECB’s deposit rate by March after President Mario Draghi hinted last week that more stimulus is in the pipeline. He reiterated on Monday that fulfilling the ECB’s inflation mandate was crucial and that the central bank remained willing to act if needed.

Germany’s notes rose, pushing the yields on two- to five-year securities to record lows, also aided by an earlier slide in oil prices and Chinese stocks tumbling to the lowest level in 13 months, which drove investors to the relative safety of fixed-income assets.

European bonds have been supported after “Draghi signaled more easing,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “It is volatile and at the moment it seems like oil prices are giving guidance to almost all the other markets.”

About one-third of the $6.35 trillion Bloomberg Eurozone Sovereign Bond Index currently yields less than zero percent to maturity. Of that, more than $1 trillion yield below the ECB’s deposit rate of minus 0.3 percent, thus deeming them ineligible for the central bank’s quantitative easing program.

Record Lows

Benchmark German 10-year bund yields fell three basis points, or 0.03 percentage point, to 0.45 percent as of the 5 p.m. close in London. The 0.5 percent security due in February 2026 rose 0.25, or 2.50 euros per 1,000-euro ($1,084) face amount, to 100.53. The price of the 10-year bund futures contract climbed to 162.03, its highest on records going back to 1990.

The yield on Germany’s two-year note reached minus 0.457 percent, while that on five-year securities touched minus 0.254 percent. Yields on Austrian and Dutch two-year securities also dropped to the lowest on record.

French 10-year bond yields dropped three basis points to 0.75 percent, having reached 0.74 percent, the lowest since May. Similar-maturity Austrian yields declined three basis points to 0.68 percent.

ECB Credibility

Forward contracts based on the euro overnight index average, or Eonia, are fully pricing-in a 10 basis-point cut to the ECB’s deposit rate in March this year, data compiled by Bloomberg show. The pricing calculation for March assumes a six basis-point spread of Eonia fixings above the deposit rate.

ECB policy makers have less than seven weeks until a March 10 meeting when they’ll decide whether their 1.5 trillion-euro bond-purchase program and negative interest rates are enough to bring inflation close to the central bank’s goal of just under 2 percent.

“Meeting our objective is about credibility,” Draghi said in a speech near Frankfurt on Monday. “If a central bank sets an objective, it can’t just move the goalposts when it misses it.”

West Texas Intermediate crude for March delivery climbed 4.3 percent to $31.64 a barrel on the New York Mercantile Exchange, after sliding earlier as much as 3.6 percent.

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