Spanish Bond Yields Drop to Record as Traders Await ECB Decision

Markets Too Dependent on Draghi and Yellen, Says Jakobsen
  • Ten-year bunds hold gain amid speculation QE will be broadened
  • Delaying QE extension to ‘raise market uncertainty’: SEB AB

Spanish 10-year bond yields fell to a record low before the European Central Bank announces its latest monetary policy decision on Thursday.

The securities rose while German bunds held three days of gains after their yield fell on Wednesday to the lowest in almost two months, amid speculation policy makers will step up their asset-purchase program or adjust its rules to ease a perceived scarcity of bonds available to buy. The central bank will announce its decision at 1:45 p.m. Frankfurt time, and President Mario Draghi will speak to reporters 45 minutes later. Besides the rates decision, the central bank also publishes updates to its forecasts for growth and inflation.

“Our main scenario is that the ECB announces an extension of its quantitative-easing program” this week, together with an elimination of the deposit-rate floor, SEB AB’s rates strategists including Marius Daheim wrote in a note to clients Wednesday. Delaying a QE extension “would raise market uncertainty, because the program’s time horizon is only six months away.”

Spain’s 10-year bond yield dropped two basis points, or 0.02 percentage point, to 0.91 percent as of 11:27 a.m. in London, having fallen earlier to a record 0.909 percent. The 1.95 percent security due in April 2026 rose 0.17, or 1.70 euros per 1,000-euro ($1,130) face amount to 109.525.

Benchmark German 10-year bund yields were little changed at minus 0.11 percent. They dropped seven basis points in the previous three sessions and fell to minus 0.127 percent on Wednesday, the lowest since July 12.

Economist Forecasts

Most economists surveyed by Bloomberg expect the ECB to announce additional stimulus measures before year-end, although not necessarily today, given that regional inflation remains well below the central bank’s goal of close to 2 percent.

A majority also expect policy makers to change the parameters of the program -- though not necessarily at this week’s meeting -- to avoid a potential shortage of securities as more bonds fall below the deposit rate of minus 0.4 percent. That makes them ineligible for purchase. The yields on $1.87 trillion of government securities that comprise the Bloomberg Eurozone Sovereign Bond Index are currently below the ECB’s deposit rate. That’s almost 30 percent of the total.

Also, 23 of 50 respondents in the Bloomberg survey forecast the central bank will remove its deposit-rate floor, meaning there would be no minimum yield for QE targets, sometime by the end of June next year.

“The extension of quantitative easing is going to come, whether it comes today or comes at another meeting, I don’t think it really matters to investors,” David Stubbs, a global market strategist at JPMorgan Asset Management Inc. in London, said in an interview on Bloomberg Television. “The idea that they would stop next year in March is preposterous given the inflation outlook, the slowing growth, and the downgrade in forecasts we are going to see.”

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