Spanish 10-Year Yields Drop Below Treasuries on Coeure Rate View

Spain’s bonds rose, sending the 10-year yield below that on Treasuries for the first time in four years, after a European Central Bank Executive Board member said interest rates in the euro area will remain subdued.

Italian 10-year yields fell to a record as Benoit Coeure said borrowing costs in the currency bloc will stay low even as they begin to rise elsewhere. Treasuries have underperformed European bonds this year as the Federal Reserve has begun trimming its stimulus program. In contrast, a package of additional ECB measures last week boosted investor demand for government bonds amid signs inflation that saps the value of payments from fixed-income assets would remain below target.

“This is a reaction to the ECB and a recognition of the fact that Europe is in a very different position to the U.S.,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “The U.S. is in some type of recovery phase. They are in a stage when their next policy move is to reduce stimulus. In Europe we are still trying to figure out if we have reached the bottom yet in terms of rates and policy accommodation from the ECB.”

The yield on 10-year Spanish bonds declined seven basis points, or 0.07 percentage point, to 2.574 percent at 4:28 p.m. London time, the least on record. The 3.8 percent security due April 2024 rose 0.59, or 5.90 euros per 1,000-euro ($1,359) face amount, to 110.57.

Treasuries Drop

The 10-year Treasury note yield rose three basis points to 2.62 percent today, the first time it has exceeded its Spanish counterpart since April 2010.

“What’s clear is that for a very long period -- several years -- monetary conditions will be divergent in the euro zone on one hand and in the U.S. and the U.K. on the other,” Coeure said on France Inter radio on June 7. “We’ll keep rates close to zero for an extremely long period. The U.S. and the U.K. will enter into a cycle of rate rises. That’s a decisive factor for market actors.”

Italy’s 10-year yields fell five basis points to 2.71 percent after touching 2.694 percent, the least since Bloomberg began compiling the data in 1993. The rate tumbled 26 basis points in the previous two days. The yield on 10-year Portuguese bonds declined 15 basis points to 3.37 percent, the least since January 2006.

Negative Rate

Treasuries have earned 2.8 percent this year through May 6, compared with 9.8 percent by Spanish debt, 8.8 percent by Italy’s and 4.1 percent by German securities, according to Bloomberg World Bond Indexes. In that time, the Fed has reduced the amount of assets it buys to stimulate the world’s largest economy as officials debate an exit to its ultra-loose monetary policy.

Bonds rallied on June 5 when the ECB became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation. Policy makers led by President Mario Draghi cut their deposit rate to minus 0.1 percent, lowered the key interest rate to a record 0.15 percent and announced measures including targeted loans known as longer-term refinancing operations.

“We’re still seeing the market adjusting to what the ECB has done,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “The ECB has lowered rates and moved the deposit rate into negative territory. Also they acknowledged that inflation forecasts are lower, so the way that plays out in the bond market is that yields have to fall and spreads have to tighten.”

Inflation Forecast

ECB staff also cut all inflation forecasts through the end of 2016, seeing consumer prices rising 0.7 percent this year, compared with an earlier prediction of 1 percent.

JPMorgan Asset Management has shifted its overweight position in the periphery to shorter-dated bonds, around three-to five-years, for which it believes the ECB’s forward guidance will provide indirect support, David Tan, global head of rates in London, wrote in a note to clients on June 6.

“European government bonds will remain supported by the specter of continued low but positive growth and inflation over the next couple of years, as well as a central bank that will remain highly accommodative,” Tan wrote. “The new targeted LTROs also provide evidence that ECB monetary policy will remain loose for the next few years and this is very positive for shorter-dated peripheral bonds.”

Investor Confidence

An overweight position means an investor holds a bigger percentage of the debt than is contained in the indexes used to measure performance. JPMorgan Asset Management has $1.6 trillion of assets under management.

Benchmark 10-year bund yields rose three basis points to 1.38 percent after a gauge of German investor confidence in the euro area fell to 8.5 in June from 12.8 the previous month, according to Sentix in Frankfurt.

The extra yield investors demand to hold 10-year Spanish bonds over similar-maturity bunds fell as much as nine basis points to 120 basis points, the narrowest since May 2010.

The spread will shrink to 100 basis points, analysts at Commerzbank AG, including London-based senior fixed-income strategist Michael Leister, wrote in a client note today.

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