European Bonds Slide as Draghi Says Region’s Economy to Recover

Euro-area government bonds slid as European Central Bank President Mario Draghi said the region’s economy will return to growth by the end of the year, reducing the need for additional stimulus.

Germany’s two-year note yields climbed to the highest since February while Italian, Spanish and Portuguese 10-year rates jumped the most in three months. Portugal’s 10-year yield climbed above 6 percent for the first time in six weeks. Draghi said the ECB kept additional stimulus measures, including negative deposit rates, “on the shelf” at today’s meeting. Euribor futures contracts declined as investors trimmed bets on lower inter-bank borrowing costs.

“Draghi seems to be more sanguine about the economic outlook next year than the market has anticipated,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Yields are rising because the market is paring back on their bets that the ECB will cut interest rates again in the near future.”

Germany’s two-year yield rose four basis points, or 0.04 percentage point, to 0.14 percent as of 4:48 p.m. London time after reaching 0.165 percent, the highest since Feb. 22. The zero percent security due in June 2015 fell 0.08, or 80 euro cents per 1,000-euro ($1,320) face amount, to 99.715. The nation’s 10-year yield added two basis points to 1.53 percent.

Italy’s 10-year yield climbed 25 basis points to 4.39 percent, the biggest intraday increase since Feb. 26, while the rate on similar-maturity Spanish debt jumped 26 basis points to 4.70 percent, also the most since Feb. 26.

‘Should Stabilize’

“Euro-area economic activity should stabilize and recover in the course of the year albeit at a subdued pace,” Draghi told reporters in Frankfurt today. “We will monitor very closely all incoming developments and we stand ready to act.”

Draghi spoke after the ECB’s Governing Council left its main refinancing rate at 0.5 percent after reducing it by a quarter point last month. The decision was predicted by 57 of the 59 economists in a Bloomberg News survey. The ECB held its deposit rate at zero and its marginal lending rate at 1 percent.

“The results of today’s meeting supports our view that the ECB is willing to see the impact of the recent rate cut and other policies and initiatives,” Scott Thiel, London-based deputy chief investment officer of fundamental fixed income at BlackRock Inc., wrote in an e-mailed statement. “We disagreed with mid-May market pricing of the introduction of a negative deposit rate.”

Yields Climb

Portugal’s 10-year bond yield climbed as much as 30 basis points to 6.09 percent, the highest since April 19.

Investors also sold bonds in emerging markets. Hungary’s 10-year yields rose to 5.92 percent, the highest on a closing basis since April 8 as traders pared bets the nation’s central bank will continue to lower borrowing costs after 10 consecutive months of easing. Bond yields also increased in Poland, Russia and South Africa.

The ECB lowered its forecast for the euro area’s economy to show contraction of 0.6 percent this year from an estimate of minus 0.5 percent made in March. Officials raised their projection for next year to 1.1 percent from 1 percent.

The ECB cut its 2013 inflation forecast to 1.4 percent from 1.6 percent. The 2014 estimate was unchanged at 1.3 percent.

“There is no smoking gun here for a move any time soon,” Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London, wrote in a note to clients. “Data flow is the most important signal for the ECB and the markets.”

Euribor Futures

The implied yield on the Euribor futures contract expiring in December rose five basis points to 0.28 percent.

HSBC Holdings Plc said the rise in German bond yields is offering an opportunity to buy as 10-year rates will fall to 1.2 percent later this year. A report today showed Germany’s factory orders fell more than economists predicted in April.

“Growth remains weak in many of the largest economies and recovery hopes may be in vain,” wrote Steven Major, global head of fixed-income research at HSBC in London. “Back at the top of their recent range, core bonds are at attractive entry levels.”

German securities handed investors a loss of 0.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish bonds returned 6.5 percent, Italian securities earned 3.9 percent, and Portuguese bonds gained 7.1 percent.

Volatility on Portuguese securities was the highest in euro-area markets today followed by those of Spain and Italy, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

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