Europe’s Yields Turn Negative on ECB Rate Cuts, Asset PurchasesLucy Meakin and Eshe Nelson
European bonds rallied, leaving two-year note yields below zero in eight countries, after the European Central Bank unexpectedly cut interest rates and said it would buy asset-backed securities to boost the economy.
The gains sent 10-year rates from Ireland to Italy to record lows and reduced the additional yield investors demand to hold those securities instead of benchmark German bunds. Governments are benefiting from the rally as they lock in lower borrowing costs, with France and Spain selling debt at the lowest yields on record at auctions today.
“Once again the ECB has surprised the market, showing further commitment to an extremely accommodative policy,” said Jose Miguel Rodriguez, an interest-rate strategist at Banco Bilbao Vizcaya Argentaria SA in Madrid. “The spread-compression process within the EMU will continue to make peripheral curves the most attractive in the coming months.”
Germany’s two-year yield fell five basis points, or 0.05 percentage point, to minus 0.072 percent at 4:19 p.m. London time after dropping as low as minus 0.084 percent, the least since December 2012. The zero percent note due September 2016 rose 0.105, or 1.05 euros per 1,000-euro ($1,297) face amount, to 100.145. A negative yield means investors buying the securities will get less back than they paid when the debt matures.
Policy makers also reduced the central bank’s deposit rate, the charge levied on banks to park cash at the ECB overnight, to minus 0.2 percent today.
“The ECB has taken a more activist approach than had been anticipated,” said Richard McGuire, head of rates strategy at Rabobank International in London. “The deposit rate has been pushed further into negative territory which is serving to push the front-end of the curve further. It forces investors along the curve in order to seek a positive yield.”
Two-year rates were negative in Austria, Belgium, Finland, France and the Netherlands, as well as non-euro-area nations Denmark and Switzerland, according to data compiled by Bloomberg. A curve is a chart depicting yields of various maturities.
Just six of 57 economists surveyed by Bloomberg News predicted the reduction in the benchmark rate. ECB President Mario Draghi also said at a press conference in Frankfurt that the central bank would purchase assets to facilitate credit flows, having a sizable impact on its balance sheet.
Euro-area money-market rates extended declines to records after sliding in the build-up to the ECB’s meeting on bets for lower borrowing costs. Three-month swaps on the euro overnight index average, or Eonia, dropped to minus 0.0803 percent, the least since at least 1999 and rates out to three years were negative today.
Three-month Euribor, the rate banks say they pay for three-month loans in euros, was set at 0.149 percent today, the least on record.
Rabobank’s McGuire recommended maintaining bets the Italian and Spanish yield spreads over German bunds would narrow to 100 basis points.
Italy’s 10-year yield dropped as much as 16 basis points to 2.302 percent, the lowest level since Bloomberg began collecting the data in 1993. The spread to bunds tightened as much as 12 basis points to 1.38 percentage point. The Irish 10-year rate tumbled as low as 1.719 percent, while Germany’s increased one basis point to 0.97 percent.
Bonds had extended this year’s rally after Draghi’s Aug. 22 pledge at Jackson Hole, Wyoming, to use “all the available instruments needed to ensure price stability.” The average yield to maturity on euro-area government securities dropped to 1.045 percent on Aug. 27, the lowest since at least 1994, according to Bank of America Merrill Lynch indexes.
Euro-area government securities returned 9.7 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s have earned 13 percent, France’s 8.4 percent and Germany’s 6.9 percent.
Spain sold 2.29 billion euros of 10-year bonds at an average yield of 2.272 percent today and 714 million euros of 30-year securities at 3.594 percent. France auctioned a total of 9 billion euros of debt due in 2024, 2030 and 2045.