Germany Leads Euro-Area Bonds Higher on Draghi’s ECB Rate Signal

Germany’s government bonds advanced, with 10-year yields dropping the most in six weeks, as European Central Bank President Mario Draghi signaled at least another 2 1/2 years of subdued interest rates.

The region’s benchmark yields fell toward the record low reached at the height of the debt crisis in 2012 as political instability from Iraq to Ukraine and signs the global recovery is stalling spurred demand for the currency bloc’s safest assets. Bonds across the euro region rose this week, extending the longest run of monthly advances since the end of 2012, with rates on Belgian, Dutch and Irish 10-year securities dropping to the lowest on record.

“Disappointing U.S. and euro-area data have boosted bunds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets in Edinburgh. “The ECB is clearly signaling a continued easing bias. This is also supportive for bunds.”

German 10-year yields fell eight basis points, or 0.08 percentage point, this week to 1.26 percent as of 5 p.m. London time yesterday, the biggest drop since the period ended May 16. The rate touched 1.237 percent on June 26, the lowest since May 2013 and 11 basis points from the record 1.127 percent reached in 2012. The 1.5 percent bund due in May 2024 climbed 0.75, or 7.50 euros per 1,000-euro ($1,363) face amount, to 102.19.

‘Unlimited Liquidity’

“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 borrowing costs 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.”

The ECB announced an unprecedented stimulus plan on June 5, which included cutting its main refinancing rate to a record 0.15 percent, moving the deposit rate below zero and introducing a program to encourage banks to lend. ECB policy makers meet on July 3.

The average yield to maturity on euro-area government bonds fell to an all-time low of 1.3039 percent on June 26, according to Bank of America Merrill Lynch’s Euro Government Index.

The rate on Irish 10-year debt fell 11 basis points this week to 2.34 percent, after touching a record 2.323 percent yesterday. The yield on similar-maturity Dutch bonds dropped to 1.477 percent the same day, while Belgian 10-year yields slid to 1.685 percent on June 26.

Euro-area government securities returned 7.2 percent this year through June 26, Bloomberg World Bond Indexes showed. The securities have gained 1.1 percent this month, after climbing in each of the previous five.

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