Spain Yield Drops From 6-Month High as Draghi Repeats QE Length

Updated on

Spanish and Italian bonds rose, driving down 10-year yields from their highest levels since November, as European Central Bank President Mario Draghi reaffirmed plans for bond-buying stimulus to continue through September 2016.

The securities rallied after declines on Tuesday, when a report showed euro-area consumer prices rose more than economists forecast. That boosted speculation the ECB’s 1.1 trillion ($1.2 trillion) quantitative-easing plan is already starting to achieve one of its aims, raising concern the program would end early.

The asset purchases are proceeding well and the effects of those measures are feeding through to the economy, Draghi told reporters in Frankfurt on Wednesday.

“Today’s ECB meeting will be interesting with yesterday’s better-than-expected inflation figures,” said Kim Liu, a fixed-income strategist at ABN Amro NV in Amsterdam. “Draghi will try to calm the market and dismiss any QE exit speculation. By reiterating that QE is here to stay, this could put downward pressure on the recent surge in yields. The outright yields and spreads of peripherals have become more attractive, which explains why people are stepping in.”

Deflation Scenario

spain 10-yr june 3

Spain’s 10-year bond yield fell nine basis points, or 0.09 percentage point, to 2 percent at 1:41 p.m. London time, after touching 2.11 percent, the most since November. The 1.6 percent bond due in April 2025 added 0.775, or 7.75 euros per 1,000-euro face amount, to 96.445.

italy 10-yr june 3

Ten-year Italian bond yields fell 10 basis points to 2.03 percent, after climbing as high as 2.14 percent, also the highest since November.

“The real worrying deflationary spiral in the euro zone doesn’t seem likely to occur now, so people can take off their worst-case scenarios and look for the more positive potential outcomes,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin.

The ECB kept all three of its key interest rates unchanged at record-low levels at Wednesday’s meeting, in line with Bloomberg surveys of economists.

For the first time in 2015, investors in European bonds are sitting on a loss. The securities are down 0.1 percent this year, according to the Bloomberg Eurozone Sovereign Bond index. As recently as April 15, the index was up 4.6 percent.

Frontloading Question

ECB Executive Board member Benoit Coeure said on May 18 that the pace of debt purchases would pick up “moderately” in May and June to counter lower liquidity in July and August. Purchases of public and private securities rose to 63.1 billion euros last month, compared to 60.3 billion in April, data released on June 1 showed.

Strategists at ABN Amro said frontloading will need to accelerate in June, while DZ Bank AG said the strategy is already working.

The yield on Germany’s 10-year bunds, the euro area’s benchmark sovereign securities, was two basis points higher at at 0.73 percent. The yield rose 17 basis points on Tuesday, the most since August 2012.

Tuesday’s inflation figures, which showed prices increased on an annual basis for the first time in six months, may ease concern among ECB policy makers that the region will suffer from deflation, one of the threats that prompted them to unleash a quantitative-easing program this year. Bund yields have surged from as low as 0.049 percent on April 17.