Euro Bonds Ignore Growth Concern on ECB Before Greece Sells Debt
Europe’s worsening growth prospects are losing significance for bond investors as bets the European Central Bank will begin asset-purchase stimulus measures support demand for the region’s higher-yielding bonds.
“It seems everything is bulletproof even when you do get relatively bad news; people are prepared to look straight through it,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “People are still hunting for yield and in the absence of any more material rise in safe-haven yields that means turning to bond markets that a more rational evaluation might lead you to be cautious about.”
Italy’s 10-year yield premium over similar-maturity German bunds fell for the first time in three days even after Prime Minister Matteo Renzi said yesterday the economy will expand less than forecast. Speculation the ECB is to unveil a quantitative easing plan will boost demand for Greece’s debt as it prepares to sell 2.5 billion euros ($3.46 billion) of five-year notes tomorrow, ING Groep NV said. Greek 10-year yields slid below 6 percent for the first time in four years.
Italian 10-year yields fell two basis points, or 0.02 percentage point, to 3.20 percent at 4:23 p.m. London time. The 4.5 percent security due March 2024 rose 0.17, or 1.70 euros per 1,000-euro face amount, to 111.165. The rate on equivalent-maturity German bunds rose two basis points to 1.58 percent.
The extra yield investors demand to hold Italy’s 10-year bonds over bunds narrowed to 162 basis points, about three basis points from the lowest since June 2011.
The daily volume of Italian debt traded on the secondary market last month was almost double the 2013 average. Turnover averaged 6.56 billion euros in March, up from an average of 3.57 billion euros last year, the nation’s Treasury said in a quarterly report published on its website today.
A report by the International Monetary Fund yesterday said the euro area’s monetary authority needs to use unconventional measures to help sustain growth. Annual euro-area inflation slowed to 0.5 percent in March, the lowest since October 2009, data showed last week.
“Inflation expectations may drift lower,” which “in turn would lead to higher real interest rates, aggravate the debt burden, and lower growth,” the report said.
Greece will sell the April 2019 notes through Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings Plc, JPMorgan Chase & Co. and Morgan Stanley, according to a person familiar with the arrangements who asked not to be identified because the details aren’t public.
The nation’s return to debt markets is the latest milestone on the euro area’s path to recovery following a debt crisis that pushed borrowing costs to record highs. The average yield to maturity on bonds from Greece, Ireland, Italy, Portugal and Spain fell to 2.25 percent on April 4, the lowest in the history of the currency bloc, according to Bank of America Merrill Lynch indexes. It rose to 9.55 percent in 2011.
Greece’s target for the sale is 2.5 billion euros, a Greek Finance Ministry official, who asked not to be identified because the process isn’t completed, said today. The offer was intended to fill the gap in the nation’s yield curve and may be followed by a 12-month bill sale, the official said.
The yield on Greece’s 10-year bonds fell 28 basis points to 5.88 percent after dropping to 5.86 percent, the lowest since February 2010.
“Greece benefits from the low-rate environment in the euro zone and from the QE talks, which are driving a substantial interest for high-yield issuers, no matter how far down they are in the credit ladder,” said Alessandro Giansanti, a senior rates strategist at ING in Amsterdam. “This is a good opportunity for Greece to pre-fund the financing needs of coming years.”
The ECB is examining measures to tackle slowing inflation in the euro area, according to Greek central bank chief George Provopoulos.
“We are reflecting on the design of a quantitative-easing program in the euro area,” Provopoulos said in an interview in Athens yesterday. The Governing Council has “unanimously committed to using all instruments within its mandate, conventional and unconventional, to deal effectively with the risks of a too-prolonged period of low inflation,” he said.
The rate on Germany’s two-year notes was little changed at 0.18 percent after the nation sold 3.5 billion euros of two-year securities. Germany auctioned the debt at an average yield of 0.17 percent, compared with 0.15 percent at a previous sale on March 12.
Greek bonds returned 30 percent this year through yesterday, the best-performing sovereign debt market according to Bloomberg World Bond Indexes. Italian securities rose 5.8 percent, Spain’s gained 6.3 percent and Germany’s advanced 2.5 percent.
Volatility on Greek bonds was the highest in euro-area markets today, followed by those of Ireland and Italy, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.