Spanish Bonds Advance as Draghi Says ECB Ready to Do More

Spanish government bonds advanced for the first time in four days as European Central Bank President Mario Draghi said officials were unanimous on being willing to introduce further stimulus measures if needed.

Italian securities also climbed as Draghi said the ECB’s current stimulus policies will have a significant impact on its balance sheet, causing it to expand toward the level it was in March 2012. The central bank, which has already started purchases of covered bonds, is set to start buying asset-backed securities this year. Benchmark German 10-year bunds were little changed.

“He still had that balance sheet target in there,” Peter Chatwell, an interest-rates strategist at Credit Agricole SA’s corporate and investment banking unit in London, said, referring to Draghi’s comments. “The reaction is simply if the ECB expands its balance sheet, then it’s more positive for the periphery.”

Spain’s 10-year yield fell six basis points, or 0.06 percentage point, to 2.14 percent as of 4:14 p.m. London time. The 2.75 percent bond due in October 2024 climbed 0.5, or 5 euros per 1,000-euro ($1,243) face amount, to 105.465. The rate on similar-maturity Italian debt dropped seven basis points to 2.36 percent.

The Governing Council “has tasked relevant euro system committees with the timely preparation of further measures to be implemented if needed,” Draghi said at a press conference in Frankfurt today, after the ECB kept interest rates at record lows. “The Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.”

ECB Decision

ECB policy makers left the main refinancing rate at 0.05 percent. The decision was predicted by all 55 economists in a Bloomberg News survey. The deposit rate remained at minus 0.2 percent.

Euro-area yields have tumbled since Draghi announced on Sept. 4 that the central bank would buy covered bonds and asset-backed securities. The average yield on euro-region government debt dropped to 1.01 percent on Oct. 1, the lowest since at least 1994, and was at 1.07 percent yesterday, according to Bank of America Merrill Lynch indexes.

The ECB’s balance sheet now stands at 2.05 trillion euros. The balance sheet expanded to more than 3 trillion euros in March 2012, before peaking at 3.1 trillion euros in June that year.

“These asset purchases will have a sizable impact on our balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012,” Draghi said today.

Quantitative Easing

The ECB will eventually extend its program into government debt, according to BNP Paribas SA and Pacific Investment Management Co., while most investors in a Societe Generale SA survey said they expect sovereign quantitative easing in the first half of next year. BNP estimate the central bank may start buying 400 billion euros of sovereign bonds before year-end, with purchases distributed in accordance with each country’s contribution to the ECB’s capital.

“Bond yields are falling as Draghi’s comments are more dovish than anticipated, teeing up QE or at very least additional unconventional measures,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.

With inflation languishing below the ECB’s target of just under 2 percent and data showing the economic recovery ebbing, the ECB has already introduced a negative deposit rate and started a program of targeted loans. While the ECB has previously bought sovereign debt under its now-defunct Securities Market Program, it has stopped short of the full-scale quantitative easing used by its counterparts in the U.S., U.K. and Japan.

Nowotny View

ECB Governing Council member Ewald Nowotny said the central bank shouldn’t start buying sovereign bonds this year and warned against giving in to financial market pressure. Instead, it needs to assess the impact of steps already taken, he said in an interview with Japan’s Nikkei newspaper published Nov. 4.

The Federal Reserve, which ended its third round of QE last month, owns about 20 percent of outstanding U.S. debt, while the Bank of Japan boosted annual buying of government bonds to a record 80 trillion yen ($697 billion) last week.

In the U.K., which has about 1.1 trillion pounds ($1.8 trillion) of outstanding conventional gilts, the Bank of England has kept its asset-purchase target unchanged at 375 billion pounds since July 2012.

German 10-year bunds yielded 0.83 percent. Germany’s government securities returned 8 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s earned 13 percent, and Italy’s 12 percent.

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

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