Euro-Area Bonds Decline as ECB Stimulus Review Signals Dominate

  • German 10-year bunds halt longest run of gains since November
  • Draghi spoke before EU lawmakers after QE-expansion hints

Once again, European Central Bank policy makers have the euro-area government bond market jumping at their every move.

Sovereign securities across the region halted last week’s advance even as President Mario Draghi reiterated that the ECB will review its stimulus program in March.

While his Jan. 21 assurance helped to push the average yield on euro-area government bonds to the lowest since April on Friday, other ECB officials speaking in Budapest Monday told investors to be realistic about any action policy makers might take. Governing Council member Ewald Nowotny called for a “rational approach from markets,” while Executive Board member Benoit Coeure stressed that without economic reforms the region’s recovery won’t last.

“The bond market has already priced in a significant amount of easing,” said Gianluca Ziglio, an executive director for fixed-income research at Sunrise Brokers LLP in London. “It seems to me they are expecting too much and too early. We’re seeing headwinds this morning from Nowotny. If the market prices too early, it’s quite a good time to sell and wait for a repricing before starting to bet again on what the ECB outcome will be.”

German 10-year bunds ended a five-day rally which was the longest run of price gains since November and pushed the yield on the euro area’s benchmark sovereign securities to a nine-month low.

The 10-year bund yield increased three basis points, or 0.03 percentage point, to 0.36 percent at 4:29 p.m. London time. The 0.5 percent security due in February 2026 fell 0.315, or 3.15 euros per 1,000-euro ($1,088) face amount, to 101.41. The yield dropped earlier to 0.30 percent, the lowest since April 30.

Spanish 10-year bond yields rose five basis points to 1.57 percent. Italy’s extended their drop, pushing the yield up six basis points to 1.47 percent, after the Finance Ministry said the nation had mandated banks for a sale of 30-year debt in the near future.

Once Bitten

Draghi’s appearance before lawmakers in the European Parliament in Strasbourg gave a further opportunity for markets to refine their expectations for March. Bonds dropped after an extension of the ECB’s bond-buying plan and deposit-rate cut in December fell short of some investors’ predictions, something Nowotny said “should give them a certain lesson.”

Since then turmoil in global financial markets has helped drive investors back to the relative safety of fixed-income securities. Euro-area sovereign debt returned 1.8 percent in January, its best monthly performance since July, according to Bloomberg World Bond Indexes.

Despite the lessons from December, some investors are expecting a multi-stranded approach from policy makers after the Bank of Japan adopted a negative-rate policy last week.

“It’s not just the BOJ but what everybody else has to do as well,” Patrick Armstrong, chief investment officer of Plurimi Investment Managers, said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. “The ECB has the most to do. It’s going to be cutting the deposit rate by 10, maybe 20 basis points and most likely increasing asset purchases.”

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