Traders Dumping Stocks, Currencies Leave Europe’s Bonds at Peace

Updated on

In a bruising day for traders globally, European government bonds have barely budged.

The China-induced stock-market rout is proving an opportunity for Europe’s sovereign debt to display resilience, just weeks after withstanding the threat of a Greek exit from the euro area. Italian and Spanish 10-year bond yields have risen less than 10 basis points, or 0.1 percent, since China unexpectedly devalued its currency on Aug. 11, sparking a selloff in shares from Tokyo to Frankfurt.

The bonds pared their drop on Monday as turbulence in currencies and global stocks intensified. They were supported by the European Central Bank’s plans to buy 60 billion euros ($69 billion) a month of securities as part of its expanded bond-buying program, underpinning other stimulus measures taken since the outbreak of the region’s sovereign-debt crisis.

A slump in commodities is also supporting demand for sovereign debt by suppressing the outlook for inflation, raising the possibility that policy makers may extend their stimulus plan. German bunds also trailed behind their U.S. counterparts amid speculation that market turmoil will prompt the Federal Reserve to delay its rate increase while ECB stimulus remains unchanged.

“If one has to pick one supportive factor for the market, it’s of course the ECB buying,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The interest of somebody going against the ECB knowing how much firepower they have is quite limited. General risk aversion would in other circumstances hit the bond market a lot more.”

Italian Yields

Italy’s 10-year bond yield rose four basis points to 1.9 percent at 4:32 p.m. London time. The 1.5 percent security due June 2025 fell 0.33, or 3.30 euros per 1,000-euro face amount, to 96.545. The yield was at 1.83 percent on Aug. 10, the day before China devalued the yuan.

Italian and Spanish bonds have also been supported by yields that are still more than 1 percentage point higher than those on German peers even after spreads narrowed.

The yield difference, or spread, between Italian 10-year bonds and German bunds widened to as much as 138 basis points. While that’s the most since July 10, it’s tightened from 575 basis points reached in November 2011. In the wake of Greece’s referendum on July 5, the spread touched 169 basis points.

German 10-year bund yields were little changed at 0.57 percent, after falling earlier to the lowest since June 1. The yield on similar-maturity Spanish bonds rose three basis points to 2.04 percent, widening the spread with German bunds to 147 basis points.

Deflation Watch

Signs of a deepening slowdown in China’s economy and tumbling commodities are stoking deflationary fears, with a measure of euro-area inflation expectations for the next year dropping below zero for the first time since March.

The euro-area one-year inflation swap rate, a market gauge of the outlook for consumer-price growth over that period, fell to minus 0.057 percent, the lowest since February, according to data compiled by Bloomberg.

The ECB’s stimulus packages are aimed at pushing up the inflation rate, which was at 0.2 percent in July, to the central bank’s goal of just below 2 percent.