Euro-Area Bonds Gain as ECB Loans Offer Chance for Cheap Funding

Euro-area government bonds rose, with Italian 10-year yields falling to the lowest in more than two weeks, as details of the European Central Bank’s targeted-loans program supported the region’s assets.

Spain’s two-year yields dropped to a record as ECB President Mario Draghi said yesterday that the take-up for private lenders in its longer-term refinancing operations could be as much as 1 trillion euros ($1.36 trillion). Irish 10-year yields fell to the lowest on record and German one-year rates slipped below zero for the first time since June 2013 as the prospect of an extended period of record-low interest rates boosted demand for government debt.

“None of the arguments for a continued rally in the periphery have gone away,” said Jan Von Gerich, a fixed-income strategist at Nordea Bank AB in Helsinki, referring to the euro area’s higher-yielding economies. “You have to find carry somewhere and the periphery offers that. The details yesterday were positive for the periphery, especially the fact the banks that are deleveraging can join the TLTRO. The pace of the rally will slow down but there is still room to go.”

Italian 10-year yields declined three basis points, or 0.03 percentage point, to 2.82 percent at 4:13 p.m. London time after being as low as 2.81 percent, the least since June 18. The 3.75 percent bond due in September 2024 gained 0.255, or 2.55 euros per 1,000-euro face amount, to 108.37. The rate slid to an all-time low of 2.694 percent on June 9.

Funding Details

Details of the ECB’s program released yesterday showed that banks will be able to access TLTRO funding that they can hold for as long as four years if they maintain or increase the size of their loan portfolio to companies and households. Banks that are deleveraging can get the funding provided they don’t accelerate the reduction in their loan book through April 2015, and keep it stable thereafter.

The loans are “looking generous to banks who were already deleveraging,” Peter Chatwell, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London, wrote in a note to clients. Volatility “should decline again, allowing the various carry trades in the euro rates market to resume their performance,” he wrote.

Draghi said in Frankfurt he’s “confident that banks will quickly understand” the details of the program. “It’s also quite attractive,” he said.

Spanish Rates

The rate on Spanish two-year notes declined three basis points to 0.39 percent after being at 0.382 percent, the least since Bloomberg started collecting the data in January 1993. The nation’s 10-year yield fell two basis points to 2.66 percent after dropping by five basis points yesterday, the steepest decline since June 9. The rate reached a record-low 2.54 percent on June 10.

Yields on Irish 10-year debt dropped as much as five basis points to 2.304 percent, the lowest on record.

ECB policy makers yesterday held the main refinancing rate at a record-low 0.15 percent and maintained the deposit rate at minus 0.1 percent.

Prospects of the ECB keeping its key rate near zero for an extended period are supporting demand for fixed-income securities and fueling a broad bond rally from Germany to Greece.

The average yield to maturity on euro-area government debt dropped to an all-time low of 1.3039 percent on June 26, according to Bank of America Merrill Lynch’s Euro Government Index. Euro-region bonds earned 1.1 percent last month, the most since gaining 2.2 percent in January, data compiled by Bloomberg shows.

German Yields

Benchmark German 10-year bund yields declined three basis points to 1.26 percent as a report showed factory orders in Europe’s largest economy fell more in May than analysts predicted. The nation’s one-year rate dropped as much as two basis points to minus 0.004 percent and the two-year note yield touched 0.01 percent, the least since May 2013.

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

Portugal’s 10-year yield was little changed at 3.59 percent.

Euro-area securities returned 7.1 percent this year through yesterday, Bloomberg World Bond Indexes show. That’s more than twice the gains recorded by bond markets in the U.S. and the U.K., where central banks are debating when to tighten policy. Greek and Portuguese securities led with gains of 30 percent and 16 percent while German debt earned 4.6 percent.

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