Investors Flag Risk of ECB Disappointing After Europe Bond RallyLucy Meakin and David Goodman
Firms from Pioneer Investment Management Ltd. to AllianceBernstein Holding LP say the odds are high that measures the European Central Bank will announce to stimulate the region’s economy will fall short of the bond market’s lofty expectations.
Yields on bonds from Belgium, France, Italy and Spain have fallen to records in the past month amid speculation policy makers meeting tomorrow may add unconventional measures, such as quantitative easing, in addition to lowering interest rates. The euro has fallen about 2.7 percent from a more than two-and-a-half year high of $1.3993 on May 8 before ECB President Mario Draghi said the central bank was “comfortable” taking measures to boost inflation.
“We see a high risk there will be disappointment,” Cosimo Marasciulo, Dublin-based head of government bonds and currencies at Pioneer Investment Management Ltd., which oversees about $244 billion, said yesterday. “The market is looking for some form of QE, or at least an opening of the door to QE, and we think the ECB will be reluctant to do this. Those who bought bunds and Italian bonds on expectations that QE in the euro zone was very close may be disappointed.”
Most European bonds fell today as a report showed euro-area manufacturing and services output growth slowed more than economists forecast in May, adding to pressure on the ECB to deliver stimulus in its battle against disinflation. A surge in euro-area sovereign bonds generated returns of 5.8 percent this year through yesterday, according to Bloomberg World Bond Indexes.
That the ECB will cut interest rates is almost the consensus view among analysts, with all but two of 60 economists surveyed by Bloomberg predicting policy makers meeting in Frankfurt will cut the benchmark rate from a record-low 0.25 percent tomorrow. Bond investors say they won’t be satisfied unless the central bank goes further than that. The ECB will also lower its deposit rate below zero, according to most analysts in a separate survey.
Germany’s 10-year yield climbed three basis points, or 0.03 percentage point, to 1.44 percent at 4:16 p.m. London time. The 1.5 percent bund due May 2024 fell 0.26, or 2.60 euros per 1,000-euro ($1,362) face amount, to 100.59. The rate on Spain’s 10-year yield increased three basis points to 2.88 percent, while that on similar-maturity Italian debt was two basis points higher at 3.02 percent.
Draghi will probably reiterate his commitment to keep borrowing costs at present or lower levels, according to two euro-area central bank officials, who asked not to be identified because the talks aren’t public. While a final decision won’t be made until tomorrow, policy makers are debating a cut of 10 or 15 basis points in both the benchmark and deposit rates, the people said.
While the market has priced in rate cuts, it “is also hoping for some concrete measures, or at least a significant focus on a mild form of QE,” said Daniel Loughney, a London-based fixed-income portfolio manager at AllianceBernstein, which oversees $454 billion of assets. “Though the ECB will likely go down this route at some stage we don’t think it will happen just yet, and so we could see a bit of a knee-jerk selloff in bunds and the periphery in the short term.”
Even so, “in cutting the deposit rate to negative the ECB will have broken another taboo, so ultimately I think this will be remembered as a dovish meeting,” AllianceBerstein’s Loughney said yesterday.
The implied yield on the Euribor futures contract expiring in December dropped to 0.17 percent today, the least on record, according to closing-price data. Three-month Euribor, the rate banks say they pay for three-month loans in euros, was at 0.301 percent, the lowest since March 7.
The rate should fall toward 0.15 percent within a month if the ECB lowers the refinancing rate to 0.1 percent and cuts the deposit rate to below zero, according Christian Reicherter, an analyst at DZ Bank AG in Frankfurt.
“Rate cuts and a negative deposit rate are the minimum” the market expects, he said.
A composite index of manufacturing and services in the 18-nation currency bloc declined to 53.5 last month from 54 in April, below an initial estimate of 53.9 published on May 22. A level above 50 signifies expansion. A separate report confirmed euro-area growth expanded 0.2 percent in the first quarter, down from a revised 0.3 percent gain in the previous three-month period.
Irish 10-year yields rose three basis points to 2.64 percent after dropping to 2.556 percent on June 2, the lowest since Bloomberg began collecting the data in 1991. Portugal’s 10-year rate added one basis point to 3.67 percent.
“From where we were in 2012 and where we are now at least 90 percent of the tightening in spreads and fall in yields is done,” said Kit Juckes, global strategist at Societe Generale SA in London. “If you’re an asset allocator you are wondering whether to stay in here. You’re certainly not doing it in the hope of narrowing spreads, you’re doing it because it’s 1 percent more yield” than bunds.
German government securities earned 3.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Italy’s returned 7.3 percent and Spain’s gained 8.3 percent.