Italian Two-Year Yields Show Rate Wagers Untouched by SelloffLukanyo Mnyanda and Lucy Meakin
For all the concern over a slide in euro-area bonds in the past month, holders of shorter-dated securities have kept the faith because there’s no immediate prospect of the central bank raising borrowing costs.
Italian two-year note yields dropped below 0.1 percent for the first time on Wednesday, while Portugal sold six-month bills with a negative yield. Even as Italy’s 10-year bond yields jumped in April by the most in 22 months, those on the nation’s shorter-dated debt fell. Shorter-dated notes held their gains on Wednesday even as those with longer maturities fell from France to Spain before debt sales on Thursday.
The notes extended a rally this week after European Central Bank Executive Board member Benoit Coeure said the institution will boost the pace of its bond-buying program in May and June. Debt with maturities between one and three years were relatively unscathed by a buyers’ strike that since April 17 wiped about 8 percent off the Bloomberg Eurozone Sovereign Bond Index.
For risk averse investors, record-low yields are still an attractive alternative to parking excess cash with central bank, which introduced a negative deposit rate in June 2014 and cut it to minus 0.2 percent in September.
“A lot of people have parked liquidity in the short end,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “If I want to have cash in a safe place, I can either give it to the ECB and pay minus 0.2 percent, but I can also put it in two-year government bonds and that is something keeping those yields anchored.”
Italy’s two-year note yield dropped one basis point, or 0.01 percentage point, to 0.10 percent as of 4:38 p.m. London time, having touched 0.089 percent, the least since Bloomberg started collecting the data in 1993. The 4.75 percent securities due in May 2017 rose 0.015, or 15 euro cents per 1,000-euro ($1,108) face amount, to 109.015.
The nation’s 10-year bond yield climbed five basis points to 1.86 percent. The yield reached a record-low 1.031 percent as recently as March 12.
Bonds across the euro region surged on Tuesday after the release of a speech that Coeure delivered said late on Monday in London, in which he said accelerated bond purchases would be in anticipation of lower liquidity in the summer. Governing Council member Christian Noyer said in Paris on Tuesday that the ECB’s quantitative-easing program can be extended if needed. Separately, Peter Praet, the central bank’s chief economist, told the Wall Street Journal that the recent selloff in bonds was a correction “in line with the prior overshooting.”
Spain’s 10-year bond yield rose five basis points to 1.80 percent before the nation auctions as much as 5.5 billion euros of securities maturing between 2018 and 2030 on Thursday. France is scheduled to sell up to a total of 10 billion euros of bonds and inflation-linked securities on the same day. The French 10-year bond yield increased four basis points to 0.91 percent.
The ECB officials’ comments came after a broad selloff that had pushed the German 10-year bund yield to as high as 0.78 percent earlier this month, the most since Dec. 8, as some investors speculated that signs of a recovery in the economy, an end to declining consumer prices and improvement in bank lending may prompt the central bank to reduce bond purchases.
“What I take from these comments from Praet is that maybe this counter reaction or correction was too brutal,” said Elwin de Groot, senior euro-area economist at Rabobank International in Utrecht, Netherlands. “My impression is that they are not extremely happy with the recent move in markets.”
Benchmark German 10-year bund yields rose three basis points to 0.63 percent. The yield has risen from a record-low 0.049 percent set on April 17.
A measure of three-month interbank loans in euros held at the least on record Wednesday, demonstrating the willingness of banks to pay each other to get excess cash off their balance sheets, as record-low borrowing costs filter through the market.
The three-month euro interbank offered rate, or Euribor, was minus 0.012 percent, according to data from the European Money Markets Institute. That’s the lowest reading for the once-a-day fixing since Bloomberg started collecting the data at the end of 1998.
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