Bond Gains Drive Spanish Yields to Record Low Amid Stimulus Bets

European government bonds jumped, pushing Spanish and Italian yields down to records, amid speculation that the region’s economic recovery is faltering enough to prompt the central bank to expand stimulus.

Spain’s 10-year rate dropped for a sixth day before data this week that analysts said will show economic confidence in Europe declined as inflation reached the slowest pace since 2009. The securities surged yesterday after European Central Bank President Mario Draghi said on Aug. 22 that bets on price increases in the euro area “exhibited significant declines.” Dutch, French and Finnish yields all fell to records.

“The outlook for monetary policy, inflation and growth -- day in and day out -- inevitably are the drivers of the bond market,” said Ciaran O’Hagan, head of European rates strategy at Societe General SA in Paris. While some investors are “quite shy about buying at such levels” there is “scope in the higher-yielding markets to see lower yields and spreads.”

Spanish 10-year yields dropped seven basis points, or 0.08 percentage point, to 2.18 percent as of 4:15 p.m. London time, after reaching 2.166 percent, the lowest since Bloomberg started collecting the data in 1993. The 2.75 percent bond due in October 2024 rose 0.695, or 6.95 euros per 1,000-euro ($1,320) face amount, to 105.135.

Italian 10-year yields fell five basis points to 2.43 percent after sliding to 2.401 percent, also the least on record. Benchmark German 10-year bunds were little changed at 0.95 percent, close to a record low set yesterday.

Narrowing Spreads

The extra yield, or spread, that investors demand for holding Spanish 10-year bonds instead of German bunds with a similar maturity dropped to as little as 124 basis points today, the least since June 12. Italy’s equivalent yield spread with bunds narrowed to 148 basis points, the tightest since June 18.

Euro-area government securities have extended a rally that started in 2012 with Draghi’s pledge to safeguard the region’s monetary union. Bonds gained this year amid skepticism that the ECB can reignite the economy without the money-creating policy known as quantitative easing that’s been pursued by counterparts in the U.S., the U.K. and Japan.

The Federal Reserve is reducing its asset-purchase program amid an improving economy and hiring.

Negative Yields

Yesterday’s gains pushed the German two-year yield to minus 0.046 percent, the lowest since December 2012, while the equivalent Belgian rate turned negative for the first time, reaching minus 0.002 percent.

A negative yield means investors holding the securities until they mature receive less back than they paid to buy them.

French bonds rose with their peers even after President Francois Hollande fired Arnaud Montebourg, industry minister for the past two years, amid disagreements over fiscal austerity. France’s 10-year yield fell as much as four basis points to a record-low 1.271 percent.

“It’s very much being carried along with the rest of Europe,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London, referring to French government debt. “The markets are hoping there is going to be QE. That’s their main focus.”

Euro-area annualized inflation slowed to 0.3 percent this month, a fraction of the ECB’s goal of just under 2 percent, according the median forecast in a Bloomberg News survey before an Aug. 29 report. Economic confidence fell this month, according to a separate Bloomberg survey before the release on Aug. 28. The Frankfurt-based ECB next sets monetary policy on Sept. 4.

Finnish Sale

Finland’s 10-year yields dropped to a record even as the nation was said to have hired banks to sell debt due in September 2020.

The 10-year rate fell one basis point to 1.098 percent and was as low as 1.082 percent. Two-year yields increased two basis points to 0.008 percent.

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

Spanish securities returned 13 percent this year through yesterday, Bloomberg World Bond Indexes show. Italy’s earned 12 percent and Germany’s gained 7.1 percent.

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