European Bonds Advance on ECB Interest-Rate OutlookDavid Goodman and Eshe Nelson
Euro-area government bonds rose, pushing German 10-year yields toward the lowest since May 2013, as European Central Bank President Mario Draghi signaled at least another 2 1/2 years of subdued interest rates.
Italian and Spanish securities advanced as the ECB’s extraordinary stimulus helped push a measure of financial conditions to the most accommodative since 2007, boosting demand for fixed-income assets. Euro-region bonds also gained as reports showed output in the currency bloc fell short of analysts’ expectations in June, while Belgium auctioned 10-year debt at the lowest yield on record.
“Bonds are still in a supportive environment,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. The purchasing-manager index reports were “a little bit disappointing but not majorly so. Rates are very much subdued on the back of the ECB so macro will really have to surprise massively to garner attention.”
Germany’s 10-year yield fell two basis points, or 0.02 percentage point, to 1.32 percent at 4:40 p.m. London time after sliding to 1.30 percent on May 16, the least since May 17, 2013. The 1.5 percent bund due May 2024 rose 0.195, or 1.95 euros per 1,000-euro ($1,359) face amount, to 101.635.
Euro-area borrowing costs have dropped since June 5, when the ECB unveiled an unprecedented package of stimulus measures designed to boost the economy. The package included cutting the main refinancing rate to a record 0.15 percent, moving the deposit rate below zero and introducing a program to encourage banks to lend.
“We have prolonged banks’ access to unlimited liquidity up to the end of 2016,” Draghi said in an interview published in Dutch newspaper De Telegraaf on June 21, responding to a question on how long rates will stay low. “That is a signal. Our program in support of bank lending to businesses will continue for four years. That shows that interest rates will remain low over a longer period. But thereafter they will increase when the recovery will firm up.”
The yield on Spanish 10-year bonds fell four basis points to 2.69 percent, after touching a record 2.54 percent on June 10. The rate on similar-maturity Italian bonds declined four basis points to 2.90 percent.
“We welcome the recent policy initiatives by the ECB and the strong signal that policy rates should stay close to zero for a very long time,” Chris Iggo, the London-based chief investment officer for fixed income at AXA Investment Managers Ltd., wrote in a note to clients. “This supports further good performance by southern European government bonds. For Europe, at least, the fixed income party should continue.”
The Bloomberg European Financial Conditions Index, which tracks the overall level of financial stress in euro-area money, bond, and equity markets to help assess the availability and cost of credit, rose to 0.82 percent on June 20, the highest level on a closing basis since 2007. A positive value indicates accommodative financial conditions.
A composite index for German manufacturing and services growth, based on a survey of purchasing managers, fell to 54.2 in June from 55.6 in May, Markit Economics said. That’s less than the 55.5 forecast by economists surveyed by Bloomberg News.
A similar French index slipped to 48, below the 50 level that divides expansion from contraction for a second month and less than the 49.3 forecast by economists.
Belgium sold 1.05 billion euros of 2024 bonds at an average yield of 1.783 percent, the lowest since Bloomberg began compiling the data in 1999. The nation also auctioned debt due in 2028 and 2045.
Volatility on Dutch bonds was the highest in euro-area markets, followed by those of Germany and Ireland, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.
German securities returned 4.2 percent this year through June 20, Bloomberg World Bond Indexes show. Spain’s gained 9.1 percent, Italy’s 8.2 percent and Belgium’s earned 6.1 percent.