Spain’s Bonds Lead Euro-Area Advance as Ifo Boosts Stimulus Case

Spanish government bonds led an advance in higher-yielding euro-area securities as a report showing German business confidence fell for a fifth month added to the case for further monetary stimulus.

Euro-region bonds have surged this year after the European Central Bank cut interest rates to a record, offered cheap cash to banks and pledged to buy asset-backed securities. ECB President Mario Draghi has said policy makers will go further if needed, including sovereign-debt purchases, or quantitative easing. National governments risk complacency with borrowing costs near historic lows, according to Moritz Kraemer, chief ratings officer at Standard & Poor’s.

“As long as there is this QE speculation and as long as the ECB is not denying that they could do something like this, there is a possibility for spreads to tighten” further, said Felix Herrmann, an analyst at DZ Bank AG in Frankfurt. “The market is caught somewhere in between bad data and on the other side you have bulls who focus on liquidity and the possibility of even more liquidity to come. Today you get the impression that the bulls have the upper hand.”

Spain’s 10-year yields fell five basis points, or 0.05 percentage point, to 2.15 percent as of 4:27 p.m. London time, approaching the record-low 2.039 percent set on Sept. 8. The 2.75 percent bond due in October 2024 rose 0.495, or 4.95 euros per 1,000-euro ($1,279) face amount, to 105.415.

The rate on similar-maturity Italian debt declined three basis points to 2.37 percent. It touched 2.253 percent on Sept. 5, the least since Bloomberg began compiling the data in 1993. The equivalent Portuguese yield dropped two basis points to 3.16 percent.

Complacency Risk

“The risk is indeed of complacency -- that national governments think the rates are at historic lows because of their achievements on the reform agenda, while in fact most of it is due to the monetary-policy stance,” S&P’s Kraemer said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro in London. “So this risk of complacency is something that we’ve been pointing out for well over a year now and we think this is more pertinent than it ever has been.”

The Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 104.7 from 106.3 in August. Economists predicted a decline to 105.8, according to the median estimate in a Bloomberg survey. The index is now at its lowest level since April 2013.

Growth Stalls

Germany’s economy contracted in the second quarter and euro-area growth stalled as international political tension and stubbornly high unemployment sapped sentiment. The risks prompted the ECB this month to say it will be more active in adding stimulus to the euro region by starting asset purchases.

Benchmark German 10-year bund yields were little changed at 1.01 percent having fallen to 0.866 percent on Aug. 28, the lowest on record.

Volatility on Finnish bonds was the highest in the euro area today, followed by those of Italy and Greece, according to measures of 10-year debt, the yield spread between two- and 10-year securities and credit-default swaps.

The Dutch State Treasury Agency sold 5.1 billion euros of notes due in January 2020 at an average yield of 0.374 percent, the lowest on record. The rate on Dutch 10-year bonds fell one basis point to 1.15 percent, and Finland’s dropped one basis point to 1.11 percent.

European government bonds returned 9.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities earned 13 percent and Germany’s 6.9 percent.

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